This Is the Year for These Stocks

What do Schwab (Nasdaq: SCHW  ) , Nike (NYSE: NKE  ) , Illinois Tool Works (NYSE: ITW  ) , Starbucks (Nasdaq: SBUX  ) , and Staples (Nasdaq: SPLS  ) have in common?

First, they're all great companies.

But they're also all holdings of the Russell 1000 Growth Index -- a basket of stocks that has underperformed the broader market by 1.5 percentage points per year over the past five years.

The market moves in mysterious ways
Predictably, many financial pundits fell all over themselves to proclaim that this was going to be the year of the large-cap growth renaissance. And you know what? It may turn out to be. Year-to-date, the iShares Russell 1000 Growth ETF is 5.6 percentage points ahead of the broader market.

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

Schwab

15

Nike

17

Illinois Tool

20

Starbucks

21

Staples

18

Data from Thomson.

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
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 31 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. Schwab, Starbucks, and Staples are Motley Fool Stock Advisor selections. The Fool's disclosure policy is rockin' the Casbah.


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  • Report this Comment On November 19, 2007, at 11:39 PM, gamalicious wrote:

    While I understand and agree with the ultimate message of this article, I think it really sends mixed signals. To draw readers in saying these stocks will outperform in the next year and then turn around and say "Ooh, no, these are way too big and over-analyzed to do well" without any explanation for the markets is a waste of time. Then to top it all off with the "Small stocks are better, Buy Hidden Gems newsletter" just kind of makes this article seem like advertising spam. Focus on content, not selling product and all Fools will be better off.

    DISCLOSURE: I own SPLS

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