Large-Caps Cheaper But Lag On Growth

12/7/2015


With 2015 in the home stretch, the S&P 500 Index enjoys a narrow lead over its sibling indexes.

So far this year, the S&P 500 has returned 3.0%, while the S&P MidCap 400 Index returned 1.7% and the S&P SmallCap Index 2.7%.

Many investors are forming a game plan for 2016, taking cues from current-year performance. With large stocks leading the pack and presumably the timeliest bets, many see little reason to stray from blue chips.

But investors should always look for buying and selling opportunities across the spectrum of stocks. To that end, we surveyed the S&P indexes from various angles, looking for attractive segments — and areas to tread carefully. Among our findings: 

Performance

Large-caps have set the pace in 2015, but not by as much as it appears, as market-weighted indexes can skew returns. So far this year, the average S&P 500 stock is up 0.8%, versus 1.5% for the average S&P 400 stock. S&P 600 stocks are flat so far in 2015.

Since the S&P 500 bottomed on Aug. 25, the average large stock has jumped 10.0%, versus 9.6% for S&P 400 stocks and 10.6% for S&P 600 names. Across the three indexes, technology stocks have rallied the farthest, gaining on average of 16.1%. Energy and financials are also showing relative strength, while consumer discretionary and health care have lagged.

Valuation

At 21 times trailing earnings, the average S&P 500 stock trades in line with historical norms since 1994. S&P 400 stocks trade at 22 times earnings, or slightly above long-term averages, while S&P 600 stocks are priced at 24 times earnings — an 11% premium to the norm.

Small and midcap stocks are looking better compared to large stocks, as relative premiums have narrowed. Today, the median S&P 600 stock trades at a 6% premium to the S&P 500, versus 11% over the last five years. Midcaps trade on par with large stocks, below an average premium of 8% since 2010. Based on price/earnings ratios and versus five-year norms, consumer discretionary and industrials look cheap, while consumer staples and health care seem stretched.

Earnings

S&P 600 stocks offer superior growth potential, with per-share profits expected to surge an average of 20.1% next year, or nearly double the 10.4% gain for S&P 500 stocks and above midcaps' 13.3%. Those estimates are probably optimistic.

Among S&P 500 stocks, analysts forecast particularly strong profit gains for technology and materials stocks but middling growth for energy, industrials, and utilities.

INDEX STATS
Most sectors have rallied nicely since the S&P 500's sell-off in late August, paced by gains in technology and energy. While S&P 500 stocks are slightly cheaper on price/earnings ratios, S&P 400 and S&P 600 stocks offer better growth records and superior projected profit gains next year.
S&P 500
(Large-Cap)
S&P
MidCap
400
S&P
SmallCap
600
Sector
Average Returns Since
------- S&P 500 Low On Aug. 25 (%) -------
Consumer discretionary
7.3
0.1
2.2
Consumer staples
10.3
1.5
11.0
Energy
11.4
20.5
12.8
Financials
11.8
13.5
13.9
Health care
4.8
4.1
7.4
Industrials
11.0
8.5
12.0
Materials
9.7
8.4
5.0
Technology
16.0
16.8
15.6
Telecom services
8.8
6.1
17.5
Utilities
3.9
5.5
12.1
Average stock
10.0
9.6
10.6
Quadrix statistics
Overall score
60
60
58
Number of stocks with Overall above 80 
100
89
131
No. of Overall above 80 & Value above 50
83
74
110
Average valuation ratios
P/E, trailing
21
22
24
P/E, estimated current year
20
22
22
P/E, estimated next year
18
19
20
P/E-to-growth (PEG) ratio
1.7
1.6
1.5
Average historical growth rates
Per-share earnings, 12 months (%)
6.6
7.1
10.9
Revenue, 12 months (%)
2.5
4.3
6.4
Cash flow, 12 months (%)
5.8
15.2
14.7
Per-share earnings, annual. 5 yr. (%)
11.8
11.8
12.7
Revenue, annual. 5 yr. (%)
6.6
7.6
8.3
Cash flow, annual. 5 yr. (%)
8.1
13.6
12.4
Average estimated per-share-profit growth
Current year (%)
4.6
7.1
7.4
Next year (%)
10.4
13.3
20.1
Annualized five-year (%)
10.3
10.4
12.5
Avg. 3-mo. change in per-share-profit estimates
Current year (%)
(1.8)
(2.0)
(2.4)
Next year (%)
(4.2)
(3.6)
(4.1)

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