Jason Zweig recently used his regular column in The Wall Street Journal to discuss the relatively poor performance of large cap stocks. It’s a theme we’ve pointed out a number of times in recent commentaries from Covestor managers who invest in small-caps, for example from Vivian Lewis and Jack Brown.
An excerpt from Zweig’s very good piece:
Over the past decade, the Dow Jones Industrial Average and the Standard & Poor’s 100 index—selected baskets of the biggest stocks—produced an annual average total return of 4.7% and 2.1%, respectively. Small and midsize companies provided an annualized total return of roughly 9% over the same span.
One major reason for the gap: The Federal Reserve’s drive to keep interest rates near zero has “made borrowing cheaper than it should be,” says Jeremy Grantham, chief investment strategist at GMO, a Boston-based investment firm. “The world is an easier place for companies skating on thin ice, while the great companies don’t have much debt, so it hasn’t benefited them.”
Another reason is growth—or, to be more precise, growth expectations. According to senior index analyst Howard Silverblatt of Standard & Poor’s, Apple (NASDAQ: AAPL) generated 2.2% of the total reported earnings of the S&P 500 last year but accounts for 2.5% of its value. Investors have bid up the stock beyond the company’s past contribution to overall profits because they expect greater future growth. Google (NASDAQ: GOOG) produced 1.1% of the total earnings of the stocks in the index but made up 1.5% of market value—until this week, when it fell to 1.1%.
Microsoft (NASDAQ: MSFT), on the other hand, generated 2.7% of the total reported earnings of the S&P 500 last year and yet accounts for just 1.7% of the current market value of the index. Wal-Mart (NYSE: WMT) produced 2.1% of all the earnings in the index but makes up only 1.5% of its value.
Source:
“Why So Many Blue-Chip Investors Are Still Singing the Blues” Jason Zweig. The Wall Street Journal, 4/16. http://online.wsj.com/article/SB10001424052748703648304576265163363258614.html
