Sunday 3 October 2010

Stage Is Set (Again) for a Blue-Chip Revival

Fundamentally

Stage Is Set (Again) for a Blue-Chip Revival

By PAUL J. LIM
Published: October 2, 2010

EVER since big blue-chip domestic stocks fell out of favor in early 2000, many market strategists have regularly been predicting their imminent return to glory.



In 2003, after the tech bubble burst and market valuations started to fall back to earth, large-capitalization stocks were supposed to catch a second wind. They didn’t.

Amid the global financial panic of 2008, investors were supposed to regain their appetite for blue chips because, in uncertain times, these industry-dominating companies could offer steadier growth. Yet, that year, large-cap stocks fell even harder than small-company stocks. And to add insult to injury, small stocks went on to outpace large ones in 2009 and so far this year. 

Today, some market watchers are armed with a kitchen sink full of arguments that the stage is set for a blue-chip revival.

Not only are the large caps cheaper than small caps by historical standards, but some of these big companies, like Hewlett-Packard and Microsoft, are trading at price-to-earnings ratios of nine or less, based on projected earnings. Large stocks also have greater exposure to foreign markets, including emerging markets like China. 

“I actually think large-cap stocks have more growth potential because they can go outside the United States,” said Thomas H. Forester, manager of the Forester Value fund, who has been bullish about this group since 2008.

Large stocks are also sitting on a mountain of cash. “At some point, these companies will start using that money to raise dividends, buy back their stock, or start buying each other,” said Robert E. Turner, chief investment officer at Turner Investment Partners, a money management firm in Berwyn, Pa. He says that cash has been especially important since the disruptions of the financial crisis.

All of these trends could benefit large-cap stocks, which have had a miserable decade. While small caps were up nearly 4 percent, annualized, from 2000 to the end of 2009, and mid-caps rose more than 6 percent, annualized, the large-cap Standard & Poor’s 500 lost about 1 percent. 

But before investors get too worked up about a pending blue-chip boom, it’s important to note that it could take months, if not years, before large stocks stage a real comeback.

FOR starters, the bull market that began in March 2009 is only 18 months old. Historically, shares of small-but-nimble companies have outpaced the blue chips through the first two years of a rally, according to Sam Stovall, chief investment strategist at S.& P. In fact, in the second years of bull markets since 1950, the S.& P. 600 index of small stocks has gained 22 percent, on average, versus 18 percent for the S.& P. 500 index of blue-chip shares.

So “there’s absolutely no reason why small caps can’t keep outperforming large caps,” Mr. Stovall said.
James B. Stack, editor of the InvesTech Market Analyst, a newsletter based in Whitefish, Mont., noted that the so-called Nifty Fifty era — when the market’s biggest growth stocks dominated — came to an end in the 1973-74 bear market. After that, small stocks trounced blue chips until the early 1980s.

That’s not the only example of a slow recovery. After the 1929 crash, it wasn’t until 1945 that large stocks made it back to even. And blue-chip stock prices appreciated at a relatively modest rate in succeeding years: 4.6 percent, annualized, from 1945 to 1953.

Finally, there’s this: Large stocks continue to be the darlings of professional investors. A recent survey of money managers by Russell Investments found that two-thirds described themselves as bullish on large growth stocks, versus only around half who are similarly optimistic about small-cap shares.

That may not be a good sign. “If the consensus says small caps will underperform large caps, you know there’s a good chance they won’t,” Mr. Stovall said.

At the very least, says Robert Sharps, who manages assets for T. Rowe Price institutional clients, even if blue chips don’t return to their late-1990s glory anytime soon, it’s still “highly probable that returns in the next decade will be markedly better than the last one.” 

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2010/10/03/business/economy/03fund.html?_r=1&ref=business

No comments: