Thursday, November 05, 2009

Small Cap Relative Valuations Look Stretched

Historically, small cap stock returns coming out of a bear market have outperformed large cap stocks. The performance of small caps relative to large caps since the March 9th lows has been no different. The small cap outperformance tends to run for a period of around two years.

(click to enlarge)

small cap performance performance versus large cap chart Fall 2009
However, this might not be the case in this market cycle. The difference this time is the relative valuations of small caps look the most stretched going back to 1983. Given the valuation gap between small and large, it appears large caps might be the better asset class at this point in the cycle.

(click to enlarge)

relative valuation small versus large cap 1983-2009
One factor that may serve as a tailwind for large cap stock outperformance is the fact many large companies generate significant amounts of revenue from foreign sources. With the U.S. Dollar weakening, the conversion of foreign earnings into the dollar will provide a boost to earnings growth near term. Additionally, the developing market countries are experiencing better economic growth, thus a benefit to the large multinational companies.


The Market Recovery and Outlook for Small-Cap Stocks (PDF)
T.Rowe Price Report
By: Jack LaPorte
Fall 2009

1 comment :

facebook fun said...

irrespective of the bears and bulls,the small cap stocks are good for investments,than the the large cap or the blue chip that have to be made on single share of small cap companies,is also relatively blue chips ,small cap companies are also providing good returns as well as dividends.