This Is the Year for These Stocks

What do Microsoft (Nasdaq: MSFT  ) , General Electric (NYSE: GE  ) , Cisco Systems (Nasdaq: CSCO  ) , IBM (NYSE: IBM  ) , Intel (Nasdaq: INTC  ) , PepsiCo (NYSE: PEP  ) , and Google (Nasdaq: GOOG  ) have in common?

First, they're all great companies.

But they're also all top 10 holdings of the Russell 1000 Growth Index -- a basket of stocks that has lost 4% overall since Jan. 2, 2001, and underperformed the broader market by nearly four percentage points per year over that period.

The market moves in mysterious ways
Predictably, many financial pundits are falling all over themselves to proclaim that this is going to be the year of the large-cap growth renaissance. And you know what? It may very well be.

But here's the thing: Although they were spouting that same message in December 2003, December 2004, and December 2005, the Russell 1000 Growth Index went right on underperforming.

What's wrong with the big boys
There have been a lot of excuses made for large-cap growth during that time span; everything from "Sarbanes-Oxley has companies losing focus" to "Their large cash hoards are not as valuable in a low-interest-rate environment."

But take a look at the number of analysts following these companies:

Company

Analyst Recommendations

Microsoft

40

General Electric

20

Cisco

33

IBM

24

Intel

47

PepsiCo

16

Google

38



With that amount of brainpower crunching the numbers on these stocks, what don't we know that could drive them up this year? Sure, a catalyst could emerge, but it's likely not an obvious one that's been ignored by investors. Moreover, even if these companies finally do outperform, I don't think the large-cap growth sector is a good place to stash your money for the next few decades.

See, historically speaking, the best-performing stocks are small. It's been that way since 1927, according to Eugene Fama and Ken French.

The Foolish bottom line
So while I can't predict that this won't be the year for large caps, I can predict that you will read an awful lot about the potential of large-cap growth stocks in the coming weeks.

My advice? Focus instead on finding the best small companies. They have the potential to offer incredible rewards and be nearly lifetime holdings in your portfolio. Even better, since many professional investors ignore small caps, you may actually find some catalysts in plain sight.

If you're looking for some specific small-cap recommendations, feel free to check out our Motley Fool Hidden Gems service free for 30 days. Together, our small-cap picks are beating the market by 25 percentage points on average. Just click here for more information.

Tim Hanson does not own shares of any company mentioned. Microsoft and Intel are Motley Fool Inside Value recommendations. The Fool's disclosure policy is rockin' the Casbah.


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