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.
| 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.