WSJ MarketBeat: Revenge of the Big Caps

May 3, 2007 at 11:13 am  ·  Category: Portfolio Management

David Gaffen over at the WSJ’s MarketBeat blog has a nice little post on the case for big caps right now.  He gave five reasons why Big Caps might outperform Small Caps going forward:

(1) Sluggish Growth – small caps are more sensitive to a slowing economy.  “Companies with predictable earnings streams are the places to be,” said Michael Barron of Knott Capital Management.  Large caps are large because alot of people buy their products or services probably because they are “staples” or “core” products or services.  Small caps tend to sell products and services that are more discretionary and which people can cut back on when times are tough.

(2) Dollar Weakness – With the Dollar getting its butt kicked by the Pound, Euro and other currencies, companies with foreign exposure are benefitting from currency translation.  When you translate those Euro earnings back into dollars you get an extra pop.  Bigger companies have more foreign exposure because, well, they are bigger and more mature and are generally at the stage where they have some or alot of international exposure.  Small caps are generally more focused on an unsaturated domestic market before making a big international push.

(3) Volatility – high quality companies, which tend to be larger, do better in volatilie markets because they are perceived as “safe”.  Investors have a “flight to quality” in shaky markets.  They are perceived that way because they are! – for points (1) stable earnings and (2) diversification through foreign exposure.

(4) The Herd Mentalityhedge funds play an increasingly important role in today’s markets – especially in terms of the short term and momentum.  Hedge funds have been and continue to be, according to this post, over weighted in small and mid caps.  Were big caps to start to outperform, we could see hedge funds make a shift into large caps which would drive up their prices.  “A stampede by hedge funds into large caps has helped fuel their gains in the past few weeks,” writes Gaffen.  Getting in before the fast money does positions you to profit from this.

(5) – Buybacks

I would also add:

(6) International Exposure – this is tangenital to point 2 about “Dollar Weakness” but nevertheless a separate point.  With the US economy slowing more than foreign economies, companies with large foreign exposure are poised to grow earnings more quickly than those concentrated on the US.  As I said above, this tends to be larger companies. 

The time of large cap outperformance is coming.  It might not be too far away.  Why not position yourself now?

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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