While small-cap stocks show strong valuations, the large-cap stock sector has traded at a discount, making it attractive, according to James Swanson, chief investment strategist with MFS Investment Management.
"Many large-cap companies are growing with a limited amount of leverage. Their ability to grow at this rate shows that they are doing it in a much more organic fashion and are not overextended with debt to finance their growth," Swanson said at an MFS year-end investment outlook luncheon on Monday at Manhattan's Le Parker Meridien Hotel. "This type of growth is much more sustainable than growth achieved through levering up their balance sheets."
Large-cap stocks returned on average 11.77 percent annually from 1926 to 2011, according to Ibbotson Associates data, compared with 16.51 percent for small-cap stocks during the same time period.
"The IT sector and industrials in the large-cap area are of interest," Swanson told Financial Advisor magazine. "These companies are flush with cash, have strong margin, earnings and yield characteristics."
"In the last year or so, large caps have been hurt by a general slowdown in Europe and in emerging markets because they derive a significant portion of their revenue from outside the U.S.," Swanson said. "As Europe and emerging-market countries recover and the U.S. remains in a slow-growth mode, these companies are poised to do well, especially the higher-quality large caps that don't have a significant amount of leverage on their balance sheets."
American firms that have extensive multinational operations include General Electric, Boeing and Coca-Cola. But Creighton University Finance Professor Bob Johnson advises individual investors to purchase index mutual funds or exchange-traded funds to gain large-cap exposure.
"Index mutual funds are more of a pure play than actively traded large-cap mutual funds and involve lower fund management fees," said Johnson who is also a financial advisor and author of Strategic Value Investing (McGraw Hill, 2014). "The advantage is that they are diversified and provide the investor with a cost-effective exposure that will mirror the performance of the large cap sector."
Although larger companies tend to have more of a global sales mix than smaller companies, Financial Advisor David Edwards maintains a mix of both large-cap and small-cap companies in client portfolios.
"Large-cap companies most likely to benefit from a bump in earnings in 2014 are not only the economically sensitive technology and industrial stocks but also consumer durables," said Edwards, president of the New York-based Heron Financial Group. "Generally, large-cap companies have more stable and reliable earnings and small-cap companies have faster growing earnings."
Large-cap stocks historically incur less risk than small cap stocks.
The annual standard deviation of returns for the Ibbotson small stock index was 32.51 percent compared to 20.30 percent for the large stock index from 1926 to 2010.
"Small stocks are much more volatile than large stocks," Johnson told Financial Advisor.
While S&P 500 earnings growth is at 6 percent from 0 percent a year ago, according to Compustat and RBC, not all advisors are convinced that large-cap stocks are the way to go moving forward.
"Revenue growth has been fairly limited this year and much of the earnings growth has come from continued cost cutting. We question how sustainable that is and what investors are willing to pay for that type of growth," said Jim Wright, a financial advisor with Harvest Financial Partners in Paoli, Pa. "While 2012 and 2013 have been very good years for large-cap stocks, valuations are a bit high and we do not find them as attractive today."