Monday, July 30, 2012

Rise of the Mega-Caps

The shining star of the stock market for 2012 so far has to be the mega-caps. As Paul Lim pointed out in yesterday's New York Times, the 50 biggest American stocks in terms of market capitalization - as measured by the Russell Top 50 index - have risen by more than 14 percent so far this year. The Russell 2000, made up of small-cap stocks, is up just 1 percent. In July alone, a tough month for most of the market, the mega-caps are up 2 percent, while the small caps have dropped by 1 percent.

One of the chief factors driving the larger stocks is that they are more likely to pay dividends. The 50 mega-caps pay an average divident yield of 2.2 percent, while the small caps pay just 1.5 percent.

It's been a huge change for the mega-caps over the past decade, after they were greatly overvalued in the dot-com bubble era. As Lim points out, in 2000, the average price-to-earnings ratio for the mega-caps reached 33. Now that number is all the way down to 13 - and with midcaps at 16 and small-caps at 20, the big stocks look like a relative bargain.

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