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Summary

  • Small Capitalization Stocks Have Outperformed Large Caps.
  • Large Capitalization Valuation Improved Year on Year Small Caps More Expensive.
  • Investors Should Rotate to Large Cap ETFS and Value Names such as Apple and Exxon Mobil.

Over the past year small capitalization stocks have significantly outperformed their large cap brethren. Small caps, as measured by the Russell 2000 (NYSEARCA:IWM), have returned 26% with large caps trailing as measured by the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY)

The large cap returns appear fundamentally driven with price to earnings ratios remaining flat to less expensive. The small cap returns show a less favorable fundamental story with the Russell 2000 PE expanding significantly to historically overvalued Albeit much more sound if negative earnings are removed.

Index

1 Year Return

PE Ratio

PE 1- Year Ago

Dividend Yield

Dividend Yield 1 Year Ago

DJIA

14.17

15.8

15.8

2.2

2.5

Russell 2000

26.33

82.8

34.5

1.3

1.9

S&P 500

21.30

17.7

18.4

1.9

2.1

Russell 2000 PE is 22.4 ignoring negative earnings.

(click to enlarge)

^RUT data by YCharts

We recommend investors take their gains in small capitalization names and reposition portfolios adding large cap value stocks and large cap ETFs.

Apple (NASDAQ:AAPL)

There is no bigger capitalization than AAPL and it is simply cheap by nearly any metric. (see table below) AAPL boasts a modest Price to Earnings of 13.0 and dividend yield of 2.3%, an earnings discount and superior yield to the indexes. Add in a hefty share buyback and investors are sure to find

Market Cap468B
Price to Earnings13.0
Forward Price to Earnings11.3
Enterprise Value/EBITDA7.9

Source: Yahoo Finance

Exxon Mobil (NYSE:XOM)

XOM is a perennially among large capitalization names. Almost any of the mega capitalization are relatively inexpensive. XOM supports a 2.7% yield with a price to earnings of 12.4. Much like Apple both are attractive relative to the large cap indexes and has repurchases a stunning $57 billion XOM shares over the last three fiscal years.

Market Cap (intraday)5:404B
Trailing P/E12.7
Forward P/E12.4
Enterprise Value/EBITDA7.0

Source Yahoo Finance

Not a stock picker -- Dow Jones ETFs

For those investors not looking to allocate to individual names the DIA ETF is an attractive options. As investors rotate away from small capitalization stocks the DIA ETF boasts a modest P/E of 15.8 and is sure to see a flight to quality bid and outperform the Russell 2000 in any market downturn.

Source: Get Ready For Large Caps To Outperform Small Caps