From Bloomberg: If 2011 was any indication, blue chip investors have finally reached the promised land. For more than a decade, small-cap stocks had trounced large, but last year was finally the big boys' chance to shine. Standard & Poor's 500-stock index eked out a 2.1 percent gain (including dividends) while the Russell 2000 Index fell 4.2 percent. Meanwhile, the giants in the Dow Jones Industrial Average delivered a solid 8.4 percent gain.
Small caps have started the year strong, but money managers such as Ben Inker, director of asset allocation at GMO, which manages $100 billion, expect big caps to retake the lead. Inker's instinct is rooted in history, as big, stable companies (and their stocks) tend to hold up better when the economy is weak. "Small caps are trading at a high price-earnings ratio at a time when we think earnings growth over the next few years may well be negative," Inker says. "So they make us very nervous." There are always historical exceptions, of course, as in the 2000-02 bear market, when the Russell 2000 beat the S&P 500 by a wide margin. That's because during the 1990s dot-com bubble, large caps so outperformed their smaller brethren that a significant valuation gap emerged. By the end of 1999 the biggest of the blue chips had an average price-earnings ratio of 35 compared to small caps' 16.5, according to the Leuthold Group. So during the crash that followed small-caps, which were more reasonably priced, fell less.
Today, however, big caps are beggars while small caps carry princely p-e's. The Leuthold Group calculates a forward-looking p-e of 10.7 for the 50 largest stocks vs. the small-cap universe's 16.3. (For the 300 largest stocks, the forward p-e is 13.) Such tempting valuations on big caps helped them overcome strong headwinds in 2011...
Learn more at http://www.bloomberg.com/news/2012-02-14/banking-on-a-blue-chip-comeback.html
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