Jeremy Grantham’s investment firm, GMO, is making strategic moves in the tech stock arena, distinguishing between the winners and losers among the mega-cap tech giants. Despite the buzz around tech stocks being overhyped, GMO isn’t backing down from this sector. The firm’s largest mutual fund, the $8 billion GMO Quality Mutual Fund, has notably included investments in five of the seven tech behemoths often referred to as the “Magnificent Seven,” contributing to its impressive 25% gain this year, surpassing the S&P 500’s near 19% rise.

Interestingly, the two giants missing from GMO’s investment portfolio are Nvidia and Tesla. Nvidia’s exclusion stems from its steep valuation, as its shares have soared 216% this year due to its pivotal role in artificial intelligence development. With challenges emerging, such as restricted access to the Chinese market and rising competition from AMD, GMO finds Nvidia’s current valuation excessive.

Tesla, on the other hand, is perceived by GMO as lacking a competitive edge in the rapidly evolving electric vehicle landscape. As more players enter the EV space, Tesla’s dominance has been challenged, with its share in the U.S. market now at an all-time low of 50%.

However, GMO’s decision to invest in the remaining five tech giants — Microsoft, Apple, Alphabet, Amazon, and Meta — reflects their belief in these companies’ long-term value. Tom Hancock, the manager of the GMO Quality Mutual Fund, notes that these companies might seem crowded investments, but their intrinsic quality and reasonable valuations make them attractive. Contrary to some analysts’ views, Hancock believes these tech stocks still have growth potential and are not overvalued when considering the long term.

This investment strategy isn’t about chasing undervalued stocks but rather avoiding assets that are excessively hyped. Hancock emphasizes the importance of focusing on both the valuation of the stock and the quality of the business. “We’re not looking for cigar butts, but rather trying to avoid what’s overhyped,” he explained.

The stance taken by GMO and Hancock sheds light on the nuanced approach required in today’s tech-driven market. While some, like market veteran Bill Smead, warn of an impending tech stock retreat, GMO’s strategic selections within the tech sector reflect a belief in the enduring value of certain key players. As the tech landscape continues to evolve, investors will be closely watching which of these tech titans continue to thrive and which may fall behind.