Large Cap Growth in 2006?

Large Cap Growth in 2006?

The Trader's U E-Letter: Issue # 177

Thursday, March 02, 2006

Large Cap Growth in 2006? Not Necessarily…Beware the Behemoths

by D.R. Barton, Jr., Chairman, Trader's U

Imagine that your Aunt Bertha wanted a portfolio that could give her market returns with low risk.  You suggest that she puts together a portfolio of the biggest stocks because they are the most stable and least likely to have financial problems.

You explain that stocks with large capitalizations are safe havens that will give market-level returns with little chance for huge portfolio upsets.

And you would be dead wrong, at least as far as large cap growth in 2006 is concerned.

The biggest stocks have been lagging the market over the past year, and their risk (or volatility) is pretty lousy, too.

The largest stocks in the land got that way by doing lots of things right.  But it sure is tough to grow (or to convince investors and traders that you can grow) when you are just so darn big.  Let's look at how the biggest large cap stocks have performed over the past year and see what we can do to protect our investment portfolios.

The Top 25: Big… And Bad

Market capitalization is a cumbersome phrase that refers to the value of a company.  It is simply found by multiplying the price of a company's stock by its number of outstanding shares.

Stocks with the biggest market capitalizations are called "large-cap" stocks.  Stocks in this classification usually have a market cap of more than $10 billion.

Large-cap stocks have been lagging the broader market significantly in terms of performance over the past year.  Let's look at a list of the 25 largest-cap stocks and their performance since the beginning of 2005:

Symbol Company Name

Market Cap ($Billions)

Change In Price Since 1/1/2005

XOM

ExxonMobil Corporation

362.5

17.7%

GE

General Electric

347.3

-10.2%

MSFT

Microsoft Corporation

277.7

1.6%

BP

BP plc (ADR)

232.6

15.0%

C

Citigroup, Inc.

231.4

-3.4%

PG

Proctor & Gamble

197.1

9.1%

PFE

Pfizer, Inc.

193.1

-2.3%

WMT

Wal-Mart Stores, Inc.

188.8

-14.5%

BAC

Bank of America Corporation

184.1

-3.0%

AIG

AIG-AMERIC.INT.GRP

172.2

0.8%

JNJ

Johnson & Johnson

171.5

-9.1%

MO

Altria Group

149.7

17.9%

TOT

TOTAL S.A. (ADR)

147.1

15.6%

JPM

JPMorgan Chase & Co.

144.0

6.7%

GSK

GlaxoSmithKline Plc (ADR)

143.8

8.4%

CVX

Chevron Corporation

126.8

9.0%

IBM

International Business Machines Corp.

126.7

-18.9%

CSCO

Cisco Systems, Inc.

124.5

9.0%

NVS

Novartis AG (ADR)

124.4

6.1%

VOD

Vodafone Group Plc (ADR)

123.0

-28.6%

RDS.A

Royal Dutch Shell Plc (ADR)

121.6

1.3%

INTC

Intel Corporation

121.2

-11.1%

SNY

Sanofi-Aventis (ADR)

119.0

7.1%

T

AT&T, Inc.

108.0

9.0%

WFC

Wells Fargo & Company

107.4

4.1%

  

Average Performance

  

1.5%

  

Standard Deviation

  

11.8

What We Can Glean from the Large Caps for 2006

For this same 14-month period, the S&P 500 Index rose 6.5%.  This data tells a very sad tale:  The biggest large cap stocks have seen limited growth…in fact, they've vastly underperformed the market.

And it could have been worse. There are five stocks in the top 25 that are oil- and gas-related.  These stocks have obviously outperformed the market as a sector in the past year, thanks to the big run up in crude oil prices.  If the performance of these five oil stocks was omitted, the average return of the remaining 20 stocks was -0.9% since the beginning of 2005.  Ouch!!

In addition to the low returns, the variability of the returns was very large, as indicated by the standard deviation of the performance numbers.  Standard deviation of returns in a portfolio is one key measure that is used to gauge the volatility and risk of a portfolio.

So, not only were the large-cap stocks weak performers, they underperformed with high risk!  That's an ugly combination.

What can you do to protect your portfolio and improve returns?

Large-cap stocks will grow more slowly in 2006 than mid- and low-cap stocks in bull runs like we've had in the past 14 months.  They are a bit more stable in down markets, so they do have a place in investors' portfolios.

But for bigger returns, with little added risk, you should consider stocks with lesser market caps in the same industry as the ultra-large cap stocks that catch your fancy.  It's much easier to impact the growth of a stock with a $1 billion or $10 billion market cap than one with a $100 billion value.

Great trading,

D.R.

Today's TU Tips & Tricks

  • Whether you're trading large-cap, mid-cap or small-cap stocks, there is One Ultimate Truth About Trading And Investing: Not using a stop loss is the easiest - and most dangerous - thing you can do.  Revisit Trader's U #152 and take a look at three guidelines for setting up your trailing stops: Stop Loss Order: The Deciding Factor in Trading and Investing.

The Chart of the Week - Pat-On-the-Back Edition ("Before" and "After" Charts)

BEFORE:

Human Genome Sciences. (Nasdaq: HGSI) BEFORE

Human Genome Sciences. (Nasdaq: HGSI) was testing resistance back in mid-January when we said a move above $10.30 would give us a good chance to move higher and fill the gap…

AFTER:

Human Genome Sciences. (Nasdaq: HGSI) AFTER

HGSI has indeed moved strongly up after the break of "gap resistance" and getting close to filling its gap.  The stock still is exhibiting strong growth and momentum, though conservative traders may want to take at least partial profits at this point, with the stock up 30% in six weeks!

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