[6/28/07] Is This the Moment for Large-Cap Stocks? I'll put that question to Ron Canakaris of Aston/Montag & Caldwell Growth (MCGFX). I know what Canakaris' view will be. He recently wrote to shareholders and told them that "Now's the time!" He argued that after a very long run for small caps, the tide would turn: "The outperformance of large cap value over large cap growth has continued for an unprecedented seven years. As investment returns normalize for these two asset categories, relative returns should favor growth by a substantial margin. As a result of these performance differences, significant valuation gaps have developed. For example, the relative price to earnings multiple of the largest twenty-five companies in the S&P 500 is at one of its lowest points in twenty years and the Russell 1000 Growth's price to sales ratio relative to the Russell 1000 Value's ratio is at its lowest point since 1980. Furthermore, your equity holdings are particularly attractive at this time. As of 12/31/06 your equities were selling at a median price to present value ratio of 76%, or at a 24% discount to our calculated intrinsic value."
[4/2/07 via russ] Sometimes what you're looking for is hidden in plain sight. And if what you're looking for are some long-term conservative investments at good value, that's the case right now.
While everyone else is off hunting emerging-market equities and high-yield bonds, take a look at something really simple and obvious:
Blue chip U.S. equities.
Yep, the companies everyone knows, like Johnson & Johnson (JNJ - Cramer's Take - Stockpickr - Rating), Procter & Gamble (PG - Cramer's Take - Stockpickr - Rating), IBM (IBM - Cramer's Take - Stockpickr - Rating), Intel (INTC - Cramer's Take - Stockpickr - Rating) and Citigroup (C - Cramer's Take - Stockpickr - Rating).
These are the world's biggest, best run, and most respected companies. They're global. They have underperformed the rest of the stock market, here and abroad, for years.
And that means today they are looking like pretty reasonable values -- especially compared to almost everything else
[3/23/07 via russ] After a seven-year run value stocks are pricier than ever. When Jeremy Grantham says that, it's time to think about buying growth stocks instead.
[7/9/06] In the bull market of the late ’90s, large-company growth stocks, and technology stocks in particular, enjoyed one of their most extended and significant periods of superior performance. Since that bubble burst in 2000, however, large-cap growth stocks have been perennial market laggards, trailing small-cap and value-oriented stocks in each of the past five years through 2004.
Several T. Rowe Price portfolio managers believe that stocks of higher-quality, large-cap companies may be poised to outperform. While small-cap stocks have outperformed in recent years, larger companies have generally had better earnings growth, so their relative valuations appear attractive. At the end of March [2005], small-cap stocks on average sold at a modest valuation premium to large-cap stocks, with the median P/E (price-earnings) ratio for large companies at 16.4X operating earnings compared with 16.6X for small-cap companies. Since 1983, small-caps have sold at a median P/E discount to large-caps of about 2%, according to The Leuthold Group, a market research firm. At the end of 1999, small-caps sold at an extreme 40% discount to large-cap stocks.
Large-cap growth stocks are also relatively attractive compared with large-cap value stocks. The Russell 1000 Growth Index has moved below its historic average P/E premium relative to the Russell 1000 Value Index. In addition, Leuthold observes that large-cap growth stocks, with a P/E ratio of 20.0X in March, are 7% below their historical average P/E, while large-cap value stocks (at 11.8X) are 18% above their historical average P/E.
-- T. Rowe Price Report, Spring 2005
[4/13/06] Tom Gardner says value ratios for small caps are flashing a yellow light (but not red yet).
[3/24/06] "The only thing I know for sure is that we're in a dramatically better place than in 1998 because we're getting a lot more earnings per dollar invested. ... In 1999 the largest 50 companie in the S&P 5000 traded at a 168 percent premium to the next 450 companies. Today the top 50 trade at a 5 percent discount to the next 450, and the big companies with strong balance sheets, globally diverse portfolios, high dividend yields and powerful brands are the cheapest. Statistically, it looks like the largest companies are at the lowest relative valuations they've been at in 10 or 15 years." -- Chris Davis, in the March 2006 SmartMoney.
[3/22/06] It's been seven years since growth stocks had their day in the sun. That's why many market-watchers think the time is ripe for this group of stocks to come back strong. To find a few companies that might offer good opportunities, we asked Morningstar, the Chicago research firm, to find some attractively priced growth companies.
[3/20/06] In the April SmartMoney, Jack Hough reports on James O'Shaughnessy's new book. While many are predicting that large-company stocks should start outperforming again, "O'Shaughnessey is calling for returns of 3 to 5 percent a year, after inflation, for the next 15 years." Shares of small companies, he argues, will do much better with real returns of 8-10%.
[3/20/06] There's an interesting link in this article on Emerging Market ETFs. It's a chart ranking the various asset classes for each of the last 15 years. I note that Large Growth did quite well for six straight years from 1994-1999. Then went on to do quite poorly for the next six years from 2000-2005. Small value did well from 2000-2004, then fell to the middle of the pack in 2005. Emerging growth had the worst or second worst performance in six of the seven years from 1994-2000. But it had the best performance in 1993 and 1999 and has been hot since 2003.
[3/16/06] Jeremy Grantham says "Growth stocks are merely badly overpriced--down from legendary levels--but value stocks, which were only a tiny bit overpriced, are now at least as badly overpriced as growth stocks."
[2/15/06] The current rally has made small caps less attractive from a fundamental valuation perspective, [Steven Leuthold] said. When small caps began to rise, they were 40 percent cheaper than large caps, according to measures like the price-to-earnings ratio. Today, Mr. Leuthold said, they are about 10 percent more expensive.
Worse yet, he said, their earnings momentum has slowed. And this fundamental deterioration has begun to show up in trading patterns. For the first time in six years, fewer than 50 percent of small caps are outperforming the Standard & Poor's 500-stock index, he said.
[2/12/06] Howard Ward believe the cycle is turning for large cap growth stocks. (Of course, the fact that he's the manager of a large cap growth fund may have something to do with it.)
[2/3/06] Schwab is now advising clients to overweight both large- and small-cap growth stocks relative to value stocks.
[1/2/06, Robert Hagstrom in the LMGTX quarterly report] Since the beginning of 2004, the stock market has bifurcated and we have found ourselves temporarily on the wrong side of the divide. I underscored the word ‘‘temporarily’’ because I firmly believe the relative outperformance of value stocks (which overwhelmingly include energy and utility stocks) to growth stocks (which overwhelmingly include consumer discretionary and technology stocks), will soon reverse. Of course, there is no assurance that this will occur.
Value stocks outperforming growth stocks and small-capitalization stocks beating largecapitalization stocks have now entered its sixth consecutive year. It has been an unprecedented period of relative underperformance by large-cap growth companies. We opined in our last commentary the market pendulum would soon begin to shift from defensive stocks to offensive stocks and from smaller-capitalization stocks to larger-capitalization stocks. Although this has occurred in baby steps over the past two quarters, we believe more substantial gains lie ahead for large-cap growth stocks.
... At present, growth stocks and value stocks trade at similar prices and that is very unusual. The reason why growth stocks should trade at higher multiples than value stocks is based on the differential economic returns for the two groups. Typically, growth stocks have higher growth rates, higher profitability and higher returns on capital compared to value stocks. In an efficient market, value stocks should trade at lower price earnings ratios because they achieve economic returns that are below the economic returns earned by growth stocks.
... Since 1978, the price to earnings ratios of value stocks compared to growth stocks has averaged about .65. At the end of the 1990s, the price earnings ratio of value stocks dipped to .32. By the end of 2004, this ratio reached .75—a 134% increase in valuation. Once again, value stock price earnings ratios compared to growth stocks are at a two-decade high.
* * *
[1/2/06, from Wally Weitz in the WVALX semi-annual report] As we have discussed in recent letters, several of the new stocks we have been buying look suspiciously like traditional “growth” stocks—e.g. Wal-Mart. High-quality companies with predictable earnings growth are generally not available at prices we are willing to pay. These stocks may be more affordable today because investors fled “growth” funds after having been burned in the collapse of the tech bubble and moved to “value” funds that had performed better during the bear market. It may also be that investors have sold these “blue chips” to buy commodity companies (especially energy), utilities and real estate stocks.
Grantham, Mayo, Van Otterloo (GMO), a quantitatively oriented investment firm, wrote about this phenomenon in a July, 2005 report. They point out that from January, 2000 through June, 2005, “value” stocks (which they define as the half of all stocks with less than the median price/earnings or price/sales ratios) out-performed “growth” stocks by 138%. According to their study, “value” is now less cheap relative to “growth” than at any other time in the past 27 years. They also found that “high quality” stocks (as measured by stability of earnings and balance sheet strength) were the cheapest relative to lower quality stocks than at any other time during the study.
This study does not prove that these stocks will do well, but it does help to explain why new faces are showing up in our portfolios. Wal-Mart, AIG, Anheuser-Busch, WellPoint, UnitedHealthcare and several other newcomers were selling at discounts to our estimates of their business values, and that is what attracted us.
* * *
[12/8/05] At the Value Investing Congress, held in New York City and attended by more than 400 investors, one major theme was the appeal of large-cap blue-chip stocks. Increasingly, investors appear to be starting to define these as "value" stocks.
[12/5/05] After beating the big boys for five years in a row, the small stock miracle may be ending -- for now (says CNNMoney).
[9/21/05] For the last five years, small-cap value funds have outperformed their larger counterparts. When one asset class outperforms another over an extended period, the result may be an imbalance in your portfolio, suggesting that now may be a good time to evaluate whether your large-cap growth allocation is underweight.
[8/30/05] Small-cap stocks have outperformed large caps ever since the tech bubble burst back in 2000, and for arguably the right reason -- small cap stocks had much lower valuation multiples. But from the bottom-up perspective of Schwab Equity Ratings, small-cap stocks are no longer a bargain.
During the March 2003 market bottom, the proportion of small-cap stocks that were given an A rating by Schwab Equity Ratings was about 34% near an all-time high, suggesting unusual value was still present in the small-cap sector at that time. Over the subsequent year, the small-cap Russell 2000 index outperformed the large-cap S&P 500 index by 26%.
But now large caps represent about 60% of A-rated stocks while the proportion of small caps has fallen to around 14%, near all-time lows. Since 1986, the only two times large caps constituted over 60% of A-rated stocks were September 30, 1994, and May 31, 1998. After each of those dates, the S&P 500 outperformed the Russell 2000 by an average 16% over the subsequent 12 months and 22% over the subsequent 18 months. Our research suggests that now might be a good time to take some profits in small caps and consider rebalancing your stock portfolio toward large-cap stocks. (Greg Forsythe, On Investing Magazine, Summer 2005).
* * *
[8/21/05] When Growth Is a Value: Since February 2002, the large growth issues are off 40 percent while value equities are trading higher by 50 percent. That disparate performance has made growth much cheaper than usual. As Leuthold notes, the multiple on large-cap growth, at 23.5 times, is 5 percent below its historical average, while the multiple on large-cap value, at 11.9 times, is 19 percent above its historical average. Devoted followers of the "buy cheap" doctrine with a sense of history should be looking at large-cap growth. (ref: chucks_angels post)
* * *
[7/22/05] In line with the thought that growth stocks may be due to come back into vogue is an article in the July 2005 SmartMoney entitled "The Sweet Spot".
In the late 1990s -- the days of outsize expectations -- investors bid up growth stocks to outrageous levels, relative to value. The Russell 2000 Growth Index peaked in June 2000 at a p/e ratio of 128; the index's value counterpart warranted a multiple of just 14. These days, though, the growth index carries a p/e of 21, while the value index has a p/e of 17. Same goes for funds, says Lipper analyst Andrew Clark. "Fund P/Es in terms of growth and value are almost on top of each other these days," he says.
"This is the most extreme swing," says Harry Lange, manager of Fidelity Capital Appreciation, who says that his fund has become "increasingly growth," with names such as Dell, Genentech, and Univsion added in the past year. "Growth hasn't been this cheap in 30 years. A lot of these stocks have been beaten down so much, we're looking for pretty big runs -- a 50 percent increase in most cases."
The article goes on to mention some of the growth picks Bill Nygren has been adding to his Oakmark Fund, Wal-Mart, Citigroup, Abbott Laboratories, Harley-Davidson, Home Depot. "He expects them all to not only show strong earnings growth, but also to benefit as investors become more willing to pay up for solid growth propects and send their P/E ratios higher.
No comments:
Post a Comment