What do Wal-Mart
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.
