Large-caps versus small/mid-caps... a debate that has taken place over the past five years. From October 2001 until year-end 2005, we had favored small/mid-capitalization stocks. And, while we still believe the small/mid-caps have superior earnings growth, and consequently capital gains potential over their large-cap brethren, we tilted our asset allocations toward large-caps in 2006. More recently, we have become increasingly friendly to large-caps given our strategy of trying to play the long side of the market safely. Manifestly, large-caps tend to trade at lower P/E ratios than small/mid-caps. They also tend to have a dividend yield, which we consider extremely important in the total return equation, as well as hopefully giving us some kind of margin of safety. This is especially true when a large-cap company plays to one or more of our investment themes.
A case in point would be 3%-yielding General Electric (GE). Followers of our work know we have been negative on GE since 4Q99, except for a brief trading foray when the shares dipped into the mid-twenties during late 2002 and early 2003, because of worries regarding GE's HUGE financial exposure. Disciples of our work should also know that we have been unwaveringly bullish on water investments, as well as companies that sell into the utility complex. Those themes are driven by the fact that this nation is going to have to spend notionally $1 trillion over the next 20 years to bring our aged electric complex into the digital era. As well, $1 trillion needs to be spent to upgrade this country's water infrastructure. Unsurprisingly, GE plays to both of those themes. As General Electric's CEO recently stated in Barron's, "For the first time in maybe 20 years, our set of industrial businesses can grow to or faster than our financial businesses... Rising demand for power generation in the U.S. and elsewhere will be another big driver of GE's earnings in coming years... The developing world's appetite for new power plants and equipment, as well as other infrastructure projects, will dwarf that of the U.S. and Western Europe in the next decade."
Accordingly, after eight years we are turning friendly toward GE's shares and would be buyers, especially on weakness.
Jeffrey Saut: After Seven Years, Turning Friendly Toward GE
Jun 13 2007, 10:10 | about: GE