A “Post-Mortem” for the Magnificent Seven…

After years of soaring returns, it seems as if the mega-cap “Magnificent Seven” tech stocks have finally hit a wall.

The Roundhill Magnificent Seven ETF (MAGS) has lost 12.5% since the beginning of this year.

Analysts are already cutting their two-year price targets on Nvidia (NVDA), essentially hedging their bets against a further decline in what was the second-best-performing stock in the entire S&P 500 for last year.

To many investors, it seems like an abrupt reversal. But paid-up Green Zone Fortunes insiders knew that it was only a matter of time before we saw this kind of decline…

What Went Wrong with Mega-Cap “Magnificent Seven” Stocks

There’s nothing wrong with having Mag 7 stocks in your portfolio, like Apple Inc. (AAPL) or Microsoft Corp. (MSFT). They’re some of the best investments in America.

But here’s the thing…

Those companies generally have a harder time crushing the market over the long haul. You’re a lot more likely to find that next 10-bagger winner looking at small-cap stocks.

Think about it.

Buyers and sellers determine stock prices. Prices rise when there are more buyers than sellers, and prices fall when there are more sellers than buyers.

Let’s use these two massive American mega caps as an example.

Microsoft‘s market cap is just shy of $2.85 trillion. Apple boasts a $3.2 trillion market cap — both of which have swelled considerably these last few years.

In fact, the sustained rally we’ve seen in the Mag 7 is a bit of an anomaly. It’s highly uncommon to see so many massive stocks grow so much in lockstep … but that was the result of investors pricing in the potentially massive paradigm shift of AI.

So, what now for the Mag 7?

Investors will have to throw a lot of cash around to move the price of a $3 trillion company (compared to the $1 trillion company Apple used to be).

A $2 trillion company can become a $4 trillion company, sure!

Given enough time, I won’t be surprised at all if Apple or Microsoft hit that level someday.

But the bigger a company gets, the more natural it is for its growth to slow. And that’s what we’re seeing now.

Furthermore, larger companies are favorable targets for government regulators looking to threaten antitrust actions. The Federal Trade Commission is actually advancing an antitrust lawsuit against Microsoft. Smaller companies attract less unwanted attention.

And let’s face it. Who doesn’t already own Apple or Microsoft? These companies are widely held by virtually every major broad-market mutual or exchange-traded fund.

On top of that, you have a whole army of Wall Street analysts who are constantly dissecting these Magnificent Seven companies. There’s simply no way to discover some “hidden gem” of knowledge that hasn’t been scoured over a dozen times with these giant companies.

What the Science Says About a Stock’s Size Factor

Let’s look at this situation through the lens of my proprietary Stock Power Ratings system.

Size is one of six primary factors I use to analyze stocks within my system. The others are:

Momentum.
Volatility.
Value.
Growth.
Quality.

I chose these six factors for a very specific reason: My research shows that stocks with high ratings in these factors tend to outperform over time. It’s even better when they boast high scores in more than one factor.

And apart from my own research, the academic literature is clear: Small companies outperform large companies, in aggregate, over the long run.

If you bought a portfolio of the smallest half of all stocks in the market and short sold a portfolio of the largest half of all stocks in the market at the same time … you would earn a positive return over time, thanks to the size factor.

Given the choice between two stocks with similar ratings on all other factors, we should prefer to buy the smaller one.

I don’t recommend that you throw discretion out the window and load up on small-cap stocks just yet.

Yet I’m still looking for the next great small-cap opportunity.

Bottom line: The Mag 7 may have grown too large for its own good. For your next market-beating trade, it makes sense to focus on smaller companies.

To good profits,