Everybody Loves Large-Cap Stocks

If you follow investment news, you likely agree with my headline. Everybody and their mother seems to be talking about large-cap stocks. Sure, I might be a bit biased since I've been an awfully broken record on the subject.

A Bloomberg article yesterday continued the chorus. The article started with the thoughts of Michel Moreno, the CEO of oil-services company Moreno Group, saying that he's putting money into well-known, blue-chip stocks. It went on to note that Grantham, Mayo, Van Otterloo guru Jeremy Grantham sees the largest U.S. stocks, including Coca-Cola (NYSE: KO  ) and Johnson & Johnson (NYSE: JNJ  ) as "overdue for gains." It points out that investors put $5.2 billion into large-cap mutual funds in January. And it includes a number of other comments from investment advisors singing the praises of large caps.

So surely large caps must be soaring? Nope. Not even close. For now, the "big ups" to big companies is all lip service. Investors flocked to small caps in 2010, pulling $77 billion out of large-cap mutual funds and sending the Russell 2000 index to a 27% finish versus a 13% gain for the S&P 100. And small-caps just keep going.

But it's pretty plain to see that bargain opportunities for investors that care about valuation are harder to come by in the smaller end of the market. The average trailing and forward price-to-earnings ratio for the 100 largest U.S.-traded stocks is 17.5 and 13.5, respectively. For stocks in the $500 million to $2 billion range, the multiples are 30 and 23.3.

The stocks we're talking about here are hiding right in plain sight. In addition to the two mentioned above, there's Microsoft (Nasdaq: MSFT  ) trading at just over 10 times forward earnings, and IBM (NYSE: IBM  ) changing hands at roughly 12 times forward earnings. These aren't the kind of companies that make you scratch your head and say "Now what do they do again?" nor are they companies that are likely to disappear in the near future.

So what's the hold-up then? It's that Mr. Market doesn't work on my, or Michel Moreno's, or Jeremy Grantham's schedule -- he does things when he darn well feels like it. Perhaps he'll continue to ignore large caps for a while longer, but I've put my money where my mouth (and digital articles) is and will be ready for him when he does come to his senses.

Johnson & Johnson, Coca-Cola, and Microsoft are Motley Fool Inside Value picks. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Coca-Cola, IBM, Johnson & Johnson, and Microsoft. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Johnson & Johnson and Microsoft, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (3) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2011, at 12:24 PM, Dividendpartisan wrote:

    I am in full agreement with Matt on this one. Great article.

    Large caps are primarily what I invest in.

    DividendPartisan

    www.dividendpartisan.com

  • Report this Comment On February 25, 2011, at 3:47 PM, andycheung2000 wrote:

    completely agree; it has got to be many years since large cap stocks were consistently so cheap. I recently switched my entire portfolio into just large Blue chips; such an action felt like a very defensive play but given the valuations, they are real value-based bargains

  • Report this Comment On February 25, 2011, at 3:52 PM, Borbality wrote:

    This has been the story for the last couple of years, so I wouldn't leave the small caps yet.

    I rebalanced my 401k to take some of the weight out of the small and mid-caps, but I wouldn't be surprised if the junk rally continues.

    That said, my other holdings are nearly all large caps.

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