The Case for Large Cap Stocks

By on October 20, 2009

Alan Brochstein has an article posted at Seeking Alpha focusing on the virtues of large cap stocks. He discovered by looking at the fundamentals large caps appear to be significantly undervalued.

Brochstein projected the total return for 20 very large cap stocks assuming that a year from now they would trade at their 10 year median PE and earn their current dividend. He then averaged their total returns and arrived at a projected one-year return of 53% for a portfolio comprised of the chosen 20 stocks. Pfizer had the highest projected total one-year return at 129%, with Intel coming in second at 80%. Brochstein has included a table with all 20 stocks (click on to enlarge):

Brochstein concludes that absent higher interest rates and/or companies failing to meet projections over the next two years, a reversion to the mean would fuel a massive rally and 2010 could be even better than 2009.

SMA Comment: Jeremy Grantham has also concluded that large cap stocks are the most enticing area of the market to invest in now. The rally since March certainly hasn’t changed that dynamic as high quality large cap names have largely underperformed the less established areas of the market.



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