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Look For Large Caps to Outperform (ETFs: JKD, JKE, JKF, PWB, PWV, VV)
J.D. Steinhilber
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Our bias in the U.S. stock market continues to be towards larger-capitalization stocks. Even though small-cap stocks have more than held their own since we adopted this posture at the outset of 2005, leadership has shifted towards large-caps in the past three months, and we expect that trend to continue.
Moreover, should a broad-based market decline occur, the downside risk for small-cap stocks is much more significant than for large-cap stocks. Small-caps are currently selling at higher P/E ratios than large-caps. Normally, small-caps sell at a discount because of their higher risk characteristics. In the current cycle, small-cap earnings had been growing at a faster rate than large-cap earnings, providing some justification for premium valuations, but small-cap sales and earnings momentum has decelerated over the course of 2005 and is now in line with the growth rates seen by large-cap companies. Given that small-cap leadership dates back to 2000, this cycle of small-cap out-performance appears quite long in the tooth, so we are maintaining our preference for large-cap stocks.
Moreover, should a broad-based market decline occur, the downside risk for small-cap stocks is much more significant than for large-cap stocks. Small-caps are currently selling at higher P/E ratios than large-caps. Normally, small-caps sell at a discount because of their higher risk characteristics. In the current cycle, small-cap earnings had been growing at a faster rate than large-cap earnings, providing some justification for premium valuations, but small-cap sales and earnings momentum has decelerated over the course of 2005 and is now in line with the growth rates seen by large-cap companies. Given that small-cap leadership dates back to 2000, this cycle of small-cap out-performance appears quite long in the tooth, so we are maintaining our preference for large-cap stocks.
« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of Seeking Alpha or its management. »
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This article has 2 comments:
- paa1404
- 5 Comments
Nov 18 07:32 AMi'm not following your comment on small having higher PE. looking at iShares website for IVV and IJR shows small and large having about the same PE. addmittedly, this may not be the most authorative measure of PE. where do you get such valuation information?
thanks,
paul
- steinie
- 5 Comments
My Website
Nov 21 09:07 AMYou can get fundamental data on the domestic S&P indexes at Barra.com. Here is the link: www.barra.com/Research...
The P/E on the Russell 2000 is even higher because the R2k includes a number of companies with negative earnings, which drives the P/E ratio into the 30s. It is published in the Wall Street Journal and Barrons.
J.D.