[3/20/07] Megacaps are now much cheaper than their smaller brethren. The top 100 U.S. stocks by market capitalization are trading at a reasonable 14 times operating earnings, Inker notes. Companies that rank in size from 501 to 1,000 trade at a steeper 21 times operating earnings, while the ones ranked from 1,001 to 3,000 go for a whopping multiple of 28.
"That's quite high by historical standards," says Ben Inker, director of asset allocation for Boston-based money-management firm GMO. "Normally you get bribed to own small caps in the form of lower P/Es, but these stocks have been on a tear." So if earnings growth does slow, there's not much room for the inevitable earnings disappointments among small caps.
[11/16/06] For the first time in years, corporate giants like American Express, IBM and Johnson & Johnson are shaping up as great values. Not only are these mega-cap stocks topping Schwab Equity Ratings’ list of highly rated stocks, but they are also trading at lower price-to-earnings (P/E) ratios relative to small- and mid-cap stocks than they’ve done in years. And for the first time since 2002, mega caps are outperforming the rest of the market. This year through October 31, the S&P 100 Index, which is a proxy for the 100 largest U.S. stocks, rose 14.4%, vs. 12.0% for small caps and 7.4% for mid caps.
What’s behind these stocks’ recent boost? As the economy slows, large, broadly diversified companies are typically better positioned to weather drops in consumer demand than small- and mid-sized companies. That may help explain the recent relative outperformance of mega-cap stocks (see chart line). The other major factor, in the chart’s shaded areas, is the relative cheapness of mega caps. Currently, the average P/E for the S&P 100 is 18.2, versus 22.0 for mid caps and 21.8 for small caps.
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