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Megacap Stocks Are Seeing Their Day in the Sun

Sunday, 29 July 2012 04:54 PM

So-called megacap stocks — corporate behemoths, the biggest of the biggest — are gaining these days while broader equity indices fall.

Since early 2011, the Russell Top 50 index of the largest-capitalization domestic stocks has climbed more than 14 percent, while the MSCI EAFE index of foreign equities has dropped by more than 15 percent, according to the New York Times.

The Russell 2000 index of small-company shares, meanwhile, has risen just 1 percent during the same time period, the New York Times added.

With dividends included, megacap stocks have returned more than 18 percent.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Megacap companies, with market capitalization rates above $50 billion, are doing well as their size and reach have shielded them from the European debt crisis, which has punished stock markets around the globe.

Expect the trend to continue, experts say.

“Large caps may finally be having their day in the sun,” said Jack A. Ablin, chief investment officer at Harris Private Bank, the New York Times reported.

Low interest rates are making big companies that pay dividends even more attractive than U.S. Treasury securities, while the flight to safety stemming from the European debt crisis has also piqued interest in the asset class.

“Basically, people have been looking to escape Europe, and those who want to keep their money in equities are probably seeking the safer shores of megacaps in the United States,” said Sam Stovall, chief equity strategist at S&P Capital IQ.

The European debt crisis has bolstered the U.S. dollar against the euro, which makes big U.S. companies a good dollar-denominated investment venue.

Even though megacaps do business in Europe and in other troubled markets, they're still bringing in revenue from elsewhere and are also cutting costs and taking other steps to adjust for murkier times as well.

“Bigger businesses, in particular since the financial crisis, have clearly proven to be more adaptable than a lot of people thought,” said Keith Trauner, co-portfolio manager of the GoodHaven Fund, which invests in a mix of big and small stocks, the Times added.

“They’ve been able to reduce costs and adjust their expense structure better than most people would have imagined.”

Some experts warned, however, that the rise of the megacap may indicate a more lasting downfall for stocks.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Smaller companies shoot up first during the birth of a bull market and decline when a bear market appears or at least when a rally cools its gains.

“The bull market that began in 2009 is likely moving toward a peak after a three-year surge,” said Robert Sluymer, managing director of U.S. technical research at RBC Capital Markets, according to the Wall Street Journal.

“2013 is likely to be sideways to down.”

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Sunday, 29 July 2012 04:54 PM
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