Large Cap Growth Lags

I’m not the first to bring this observation but when I ran the statistics for year end 2004, I thought this was worth pointing out again.  Large cap growth has underperformed by a mile compared to all other equity styles. 

Large_vs_small_chart_4

Source: Stockcharts.com
Despite the relatively good fundamentals relative to other asset classes…
 
FIVE YEAR FIVE YEAR EARNINGS
HISTORIC HISTORIC GROWTH RETURN % OF LT NET
REVENUE EARNINGS 2005 VS ON DEBT TO PROFIT
GROWTH GROWTH 2004 EQUITY CAPITAL MARGIN
RUSSELL 2000 2.0% 52.0% 11.4% 30% 2.8%
S&P MIDCAP 4.0% 7.0% 18.0% 13.1% 30% 5.9%
S&P BARRA VALUE 1.0% 1.0% 10.0% 14.3% 39% 7.4%
S&P 500 2.0% 2.0% 6.0% 17.4% 33% 8.5%
S&P BARRA GRWTH 6.0% 5.0% 12.0% 25.3% 26% 10.7%

The large cap growth stocks are trading at 5 and 10 year valuation lows…

10 YEAR PRICE TO PRICE TO 2005
PRICE TO AVERAGE EARNINGS EARNINGS P/E TO
EARNINGS PRICE TO RELATIVE TO RELATIVE TO LONG TERM DIVIDEND
2005 EARNINGS 10 YEAR AVG 5 YEAR AVG GROWTH YIELD
RUSSELL 2000 25.8 30.6 0.9 0.8 1.5 1.1%
S&P MIDCAP 18.3 20.4 1.0 1.0 1.2 1.0%
S&P BARRA VALUE 14.8 17.6 0.9 0.9 1.4 1.9%
S&P 500 17.5 21.3 0.9 0.9 2.9 1.6%
S&P BARRA GRWTH 20.3 26.7 0.8 0.8 1.5 1.3%

Source: Baseline

Obviously, the strong performance of large cap growth in the late 1990s contributed to the current underperformance.   

And you can take umbrage with the idea large cap growth stocks are "cheap".   At 20x earnings, the stocks are not cheap in an absolute sense.  And the average 10 year Price to Earnings ratio of 26x reflects the fact that large cap stocks haven’t really been cheap for the past decade.  However, they are cheap relative to other equity classes, especially small cap stocks. 

Therefore, if you believe the market will hold together at these levels, I think large cap growth stocks are your best bet to outperform the indexes over the next two to three years. 

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