This Is the Year for These Stocks

What do Wal-Mart (NYSE: WMT  ) , Abbott Labs (NYSE: ABT  ) , Amgen (Nasdaq: AMGN  ) , Lowe's (NYSE: LOW  ) , and Texas Instruments (NYSE: TXN  ) have in common?

First, they're all great companies.

But they're also all major holdings of the Russell 1000 Growth Index -- a basket of stocks that has underperformed the broader market by 3 percentage points per year over the past five years.

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 early 2003, 2004, and 2005, the Russell 1000 Growth Index went right on underperforming.

What's wrong with the big boys?
There have been a lot of excuses 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

Wal-Mart

21

Abbott Labs

16

Amgen

29

Lowe's

22

Texas Instruments

40

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'll keep reading about the opportunity in large-cap growth until the cows come home.

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 30 percentage points on average. Just click here for more information.

This article was originally published on Dec. 19, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Wal-Mart is a Motley Fool Inside Value recommendation. The Fool's disclosure policy is rockin' the Casbah.


Read/Post Comments (0) | Recommend This Article (67)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 524888, ~/Articles/ArticleHandler.aspx, 8/23/2014 11:30:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement