Jeremy Grantham's GMO divides the mega-cap tech stocks into these winners and losers

• Jeremy Grantham's firm GMO considers some of the mega-cap tech stocks as worth investing.
• It's largest mutual fund invests in five of the Magnificent Seven, avoiding Nvidia and Tesla.

Despite Jeremy Grantham's knack for calling out market bubbles, his firm isn't shying away from the tech stock craze that some have cautioned is overhyped.

The largest mutual fund at his firm GMO includes investments in five of the so-called Magnificent Seven tech giants, which have driven the bulk of this year's equity rally.

The only two firms left out of the $8 billion GMO Quality Mutual Fund are Nvidia and Tesla, Bloomberg reported.

Meanwhile, embracing the other five stocks — Microsoft, Apple, Alphabet, Amazon, and Meta — has helped the fund achieve a 25% gain this year, ahead of the S&P's 500's rise of nearly 19%. Investments in the fund are dictated by company track records and intrinsic quality.

"It's funny: companies like Microsoft and Apple, you would think those would be super crowded companies but I actually don't know that they are," Tom Hancock, who manages the GMO Quality Mutual Fund, told Bloomberg. "We hold them. Obviously, we think the valuations are reasonable."

However, he considers Nvidia too expensive. Shares have rocketed 216% this year on the firm's emerging importance in artificial intelligence development.

Some analysts have questioned whether it has further room to run, and challenges are also emerging, as access to the Chinese market closes and new competition from AMD rises.

Hancock also said that Tesla doesn't have a leading edge over its competitors. Its dominance of the electric vehicle space is beginning to be tested, with its share of the US industry now at a record low of 50%.

But the remaining tech stocks still have room to rise, and aren't overvalued on a long-term basis, Hancock told Business Insider in a separate November interview.

Not every analyst shares this sentiment. In a recent note, market veteran Bill Smead warned that the current equity rally offers few long-term returns, and will face a serious retreat once investors' tech excitement wanes.

"Tech stocks are in the late stages of the biggest speculative orgy I have seen in 43 years of stock market participation," he wrote.

For his part, Hancock told Bloomberg that companies offering a high return on capital justify paying a higher premium.

Rather than finding undervalued bargains, the aim is to steer clear of overly inflated assets.

"We focus on valuation of the stock as well as quality of the business," he said. "We're not looking for cigar butts, but rather trying to avoid what's over hyped."