Cheap, cheap, cheap. That’s what fans of large-cap U.S. stocks say this part of the market has remained for far too long. True, you can’t get turbo-charged growth from a big company – a Proctor & Gamble isn’t going to double its earnings in 2012 – but that, investment managers argue, isn’t enough to explain why the S&P 500-stock index is trading at 12 times trailing earnings per share, while companies in S&P’s small-cap index command an impressive 18.5 times their trailing earnings.
Those who say this state of affairs is downright irrational can’t agree on its causes. Some argue that asset allocation models dedicate more capital to smaller and mid-cap companies in the name of diversification, even when valuation issues don’t warrant it. Others, like Scott Schermerhorn, a principal at Granite Investment Advisors in Concord, N.H., argue that hedge funds, which like to dabble in the mid-cap arena, may have had an impact. Whatever the reason, Schermerhorn says, large-caps are the cheapest they have been in decades. “Over 30 years, they historically have traded at parity to smaller stocks, and now there is this incredible discount,” he says. “The notion that they can’t grow is flawed; in fact, growth is more stable than that offered by smaller businesses.”
Still not convinced? Consider the fact that if the U.S. economy remains sluggish – or even returns to ‘normal’ GDP growth levels of around 4 percent -- it’s likely that emerging economic giants such as China and India will continue to generate higher growth rates. And which companies are best positioned to tap into that growth? Hint: it’s not the fledgling consumer products companies, most of whom will see growth come from flogging new kinds of products in new ways to the domestic market. “We are a more global economy; new avenues are opening up to sell goods to the rest of the world, and the bigger companies are better positioned to profit from that,” says Schermerhorn.