Large-Cap Growth Ready to Lead?
Small- and mid-cap stocks were the stars in the early legs of the current economic and market recovery, but may be ready to pass the baton to their large-cap counterparts as the economy moves from recovery to expansion mode.
According to BlackRock's Jeff Lindsey, head of the Fundamental Large Cap Growth equity team and portfolio manager of the BlackRock Capital Appreciation Fund and BlackRock Focus Growth Fund, all stocks enjoyed a spectacular run over the past couple of years, but small caps were the real standouts. "As the economic cycle progresses, however, I think it will be a tall order for smaller companies to produce the type of outsized results they achieved in the immediate post-recession period."
Championing the Blue Chip
Mr. Lindsey is not alone in his beliefs. In a recent Barron's survey of wealth-management firms, large caps came out on top, with some of the biggest wealth managers in the US recommending increasing exposure to blue chips to levels not seen since before the 2008 financial crisis.
Mr. Lindsey certainly sees opportunity in this area of the market. "I continue to be encouraged by the trends we're seeing in earnings, and believe there are tailwinds that should help large-cap growth stocks to perform well in 2011," he remarks, noting that earnings among large companies have continued to climb over the past year and, as such, price-to-earnings ratios for large-cap growth stocks remain below historic averages. In short, not only are large-cap companies exhibiting strength in their businesses, but their stocks also appear to be a value relative to the broader market.
Economy OK, Large-Cap Companies Better
Large-cap US companies also offer solid growth prospects, especially when compared to the overall growth of the US economy. Why is this so? "These companies are taking advantage of international growth by expanding into new markets and addressing new consumers," Mr. Lindsey explains. "Whereas the US economy is reliant on the US consumer, US growth companies have business drivers both inside and outside the United States."
Mr. Lindsey, who has 26 years of investment experience, also argues that many companies within the large-cap universe are ultra-efficient and highly productive at generating earnings and cash flow growth. "We're finding a number of companies that have been able to gain market share from their competitors and that are introducing new products. This, combined with an overall environment of strong corporate balance sheets and improving confidence, leads us to believe that companies and consumers will continue to accelerate their spending, positives for large-cap growth stocks."
Not only should investors have an allocation to large-cap growth stocks, according to Mr. Lindsey, but he believes there are risks to not being invested in them amid an improving economic and business environment. "Given that valuations are fully supported by strong earnings, the fundamentals argue strongly for an allocation to growth stocks."
Stock of a widely known company with a reputation for solid earnings and dividend growth, as well as high-caliber management, products and/or services.
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