If stocks were sports teams, the more mature large caps would be the equivalent of the NBA, while less experienced, less refined small caps would be like college basketball. Many fans may prefer the college game, but very few college players can make it in the NBA. And the attention small caps have received over the last 18 months is something like March Madness.
Small-cap stocks have soared 103% since the market's low point in March 2009, while large caps have lagged-rising 73%. But portfolio managers are now becoming bullish on large company stocks and see them as the ones best equipped to benefit from the economic recovery. They boast stronger balance sheets, better access to capital and wider international market penetration, qualities that have made them the darlings of the market. And it doesn't hurt that they're currently trading at a discount.
"In general, if we're going to enter a world in which credit is tougher and more expensive to get, it helps to be a larger company with a stronger, more established history and business," says Matthew Miller, a portfolio manager with M.E. Miller Investors in Malibu, Calif.
Managers say their exposure to foreign markets is going to be key right now, because it gives them non-dollar revenues-at a time when the dollar may be weakening. Not only can they protect their earnings by generating sales in stronger currencies, but if the dollar declines, it also means their non-dollar revenues will be worth more when they convert them back into dollars at home.
But the real value in overseas exposure is the growth potential. Less-developed countries are where the real growth is expected to take place over the next decade.
"Large caps on average have more international revenue than small caps, thus providing a partial hedge against a weak dollar, and providing a relatively low-risk way to invest in emerging markets," Miller says.
More developed countries, like the U.S. and those in Europe, are already mature and don't expect to see their GDP grow by much more than 3% this year. Meanwhile, less-developed countries like China, India and Brazil not only have taken on less debt and avoided the subprime housing crisis but also enjoy more room to grow-which they are expected to do at about 8% this year. Companies that sell products such as computers and cell phones in those countries will be able to ride that growth curve.
"Those countries are better-positioned to come out of this downturn," says Thomas Samuelson, chief investment officer of Advanced Equities Asset Management, based in San Diego. "As their per capita consumption grows, and they want what we have, it provides opportunities for companies providing those products."
Emerging countries need infrastructure, roads, railways, power generation and commodities. And once those are built, they will consume more cars and fossil fuels, as well as luxury goods, managers say.
Companies likely to benefit from international exposure are Apple Inc., Johnson & Johnson and United Technologies Corp., which reap at least 50% of their revenues from outside the U.S. IBM, which gets 65% of its revenues from overseas, and Hewlett-Packard, which gets a whopping 70% of its revenues from abroad, will also be able to ride that overseas growth. And yet they're all trading at price-earnings multiples of about 12, managers say.
"The three sectors most highly geared for foreign sales are technology, which derives more from foreign sales than U.S. sales; energy; and U.S. staples, like a Procter & Gamble," says Christian Hviid, chief market strategist for Genworth Financial Asset Management in Encino, Calif.