I came across a recent headline: “If you don’t own these four stocks, you’ve missed half the market’s gain this year.”

Sounds interesting, right?

Well, it’s worded a little wrong.

A correct way to put it would be: “If the S&P 500 Index didn’t have these four stocks, its return would have been half the market’s gain this year.”

Because the S&P 500 is weighted based on the market cap of the companies inside it.

So instead of thinking about which companies in the S&P 500 carried it higher, you should think about which smaller companies are significantly outperforming the index.

Finding those opportunities is how you outperform the S&P 500. Let me explain.

If you care about which stocks make up the S&P 500’s gains, you’re looking at stocks with a higher market cap, like Apple Inc. (Nasdaq: AAPL). But you would be missing a stock that carries much less weight in the index while soaring higher, like Abiomed Inc. (Nasdaq: ABMD).

Take a look at the performance for all 500 stocks in the S&P 500 so far this year, with an emphasis on where Apple and Abiomed fall.

S$P 500 Stocks

Even though Apple was, according to the article, one of the four stocks you needed to own to achieve the S&P 500’s 6% gain so far this year, it falls well in line with dozens of other stocks.

Meanwhile, Abiomed soared more than 120% since the start of the year, but there’s no mention about how that played a part in the market’s rally.

Outperform the S&P 500

That’s because with such a small market cap, just $19 billion versus $952 billion for Apple, it has a minimal impact on the S&P 500’s daily return.

Simply put, you can’t expect to see gains of more than 100% in a year if you just own the S&P 500.

If you want bigger and much more rapid returns, you need to find these under-the-radar stocks that can soar higher.


Chad Shoop, CMT

Editor, Automatic Profits Alert