Size Matters

The case for big caps.

Who says bigger isn’t better? for the three years ending March 31, 1999, the Texas Monthly Biz Index, a market-capitalization-weighted index tracking the approximately 650 publicly traded companies headquartered in Texas, shows an overall return of 72.6 percent—and big-cap stocks get the credit. During this period, the performance of big caps outpaced that of small caps by nearly two to one. Since March 1996, the five largest Texas stocks are up 104.2 percent, versus 52.6 percent for all others.

Why? Late in a bull market, size matters. The bigger the company, the greater the odds you’ll stay ahead of the market. And in bad times big stocks hold up much better than small stocks do: There is a “flight to quality” phenomenon driven by investors who are looking for consistent earnings growth and afraid the small cap they’re holding may not be in business at the end of the next bear cycle. The time to own small caps is during the early stages of a bull market, because their revenues and earnings are almost totally concentrated in the U.S.—and as the U.S. economy recovers, small-cap earnings grow much faster than their globally diversified big-cap counterparts. So if you’ve been loading up on small caps as a nod to their value, expect to lag the market until the start of another bull run.

Of course, every rule has an exception, and every rally has a counterrally. In the first quarter of 1999 small-cap stocks were up slightly, while big-cap stocks pulled back. But as was the case the last time this happened—in the third quarter of 1997—you should view the anomaly not as a deterrent but as an incentive to invest. History shows that a strong performance from big-cap stocks is mighty likely at this stage in a bull market. As such, the dip in prices should be regarded as an opportunity. Don’t delay: Buy big stocks now.

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