Shares of the largest U.S. companies will probably return more than smaller stocks because the economic recovery will shift investors’ attention to earnings and valuations, according to Oppenheimer & Co.
Companies with $25 billion or more in stock-market value are a better bet and their outperformance is “overdue,” as they report higher earnings and small-cap valuations signal those stocks may be too expensive, Brian Belski, chief investment strategist, wrote in a note today. The New York-based company recommends 16 stocks ranging from Abbott Laboratories to McDonald’s Corp.
While smaller companies tend to perform better at the beginning of an economic rebound, larger corporations tend to take over later, Belski said. The U.S. economy has expanded for the past six quarters and is forecast to grow at a 3.1 percent rate in 2011, according data and estimates compiled by Bloomberg. Companies in the Standard & Poor’s 500 Index beat fourth-quarter earnings estimates by 7.3 percent, more than the 4.9 percent rate for the S&P SmallCap 600 Index, Bloomberg data show.
“Large caps have a greater potential to outperform small caps as the economic recovery firms up and the bull cycle for stocks begins to mature,” Belski wrote. “This is the time when macro themes give way to fundamental investing, and quality begins to matter more for performance.”
The S&P 500 advanced 94 percent through Feb. 4 after sinking to a 12-year low in March 2009. The small-cap index surged 133 percent.
While both large- and small-cap stocks have grown more expensive since then, the small-cap valuation “appears hefty,” Belski wrote. The benchmark U.S. equity gauge is trading at 15.7 times earnings, 56 percent higher than March 2009, while the small-cap index has a price-earnings ratio of 27.7, almost 150 percent more than it was in March 2009.
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