Do Large Caps Look Stronger Than Small Caps?

Conventional wisdom and historical evidence suggest that small-cap stocks have performed best during and immediately after recessions. But that doesn't mean you should write off large-cap stocks' potential for gains.

According to recent numbers from the Gallup Job Creation Index, our economy is looking up. Roughly 29% of employees report that their employer is hiring, while just 19% say their employer is letting people go. That 10-percentage-point difference matches the widest margin of 2010. More significantly, big companies are apparently opening up more jobs -- 42% of those who work at companies that employ 1,000 or more workers report hiring.

Where the jobs are
If big American companies are hiring, that's a bullish sign for the economy. Better still, their improved performance could signal higher stock prices to come, since there's been a strong correlation lately between online job listings and future stock market performance. We just shouldn't try to be too precise about when particular stocks might get a boost from hiring. Unemployment levels often lag economic indicators. In other words, by the time unemployment falls, the economy will have been improving for quite a while.

Still, hiring is simply promising news. Here are some of many big companies expanding their workforces this year:

  • Wal-Mart, which is already the nation's biggest non-government employer, is continuing to open new stores and staff them. News reports state that it's hiring some 430 people for a store in North Raleigh, N.C., and it expects to add 1,200 in Washington, D.C. over the next two years. Expected new stores and renovations could create thousands of jobs across the country.
  • Hiring news isn't confined to low-paying retail jobs, either. Listings for technology-oriented jobs are up 38% over last year on the Dice.com website, with Apple and Google leading. Google has added about 3,500 workers during the first nine months of the year, and recently announced across-the-board 10% raises and bonuses to retain its workforce, suggesting that the economy is offering them other lucrative options. Cisco Systems plans to hire between 2,000 and 3,000 people in the coming year.
  • Some recent hiring is seasonal, but it's still valuable, keeping many people afloat until more permanent jobs materialize. It also reflects a recovering economy. United Parcel Service, for instance, plans to hire 50,000 seasonal workers, while Amazon.com is looking to hire 15,500. All told, between 550,000 and 650,000 seasonal hires are expected this year, up from last year but lagging behind 2007's 720,000.

Such large-cap companies wouldn't be hiring if they didn't expect to have more work to do. That's auspicious news for investors.

Don't forget those small caps!
I don't want to suggest that you shouldn't give consideration to small-caps, though. They do tend to perform well after downturns, often because they fell more sharply than larger outfits when trouble struck.

Smaller companies can carry more risk, since they're less established and predictable, and may not yet have the kinds of competitive advantages that have helped build and protect today's large caps. But they also hold more potential, because they can grow more rapidly than larger companies.

Best of both worlds
Fortunately, you don't have to figure out whether this is the perfect time to load up on large caps or small caps. There's a place for both in your portfolio, and no matter what the state of the economy, there are always bargains to be found in both camps.

As you look for long-term winners, consider both big and small companies. Keeping an eye on hiring reports can also help you figure out a company's growth expectations, and provide reassurance that we are, at last, finally moving into better economic times.

Longtime Fool contributor Selena Maranjian owns shares of Apple, Google, and Wal-Mart. Google and Wal-Mart are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers choice. Apple, Amazon.com, and FedEx are Motley Fool Stock Advisor selections. Wal-Mart is a Motley Fool Global Gains recommendation. United Parcel Service is a Motley Fool Income Investor selection. The Fool has a bull call spread position on Cisco Systems. The Fool owns shares of Apple, FedEx, Google, United Parcel Service, and Wal-Mart.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is Fools writing for Fools.


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