Re: Birchtree's account talk
On 5/13/06 I posted an article from The Wall Street Journal that was edited. I will try and post the majority of this article because I think it has merit especially after the news was released today about hedge funds.
From TWSJ on5/8/06 by Ian McDonald and Gregory Zuckerman.
At long last, investors are beginning to shift toward megacaps. It makes sense that stocks with the largest market capitalization are coming into vogue. After doing unexpectedly well last year, the dollar is trading at its lowest level against the euro in nearly 12 months and at a nine-month low against the yen. A weaker dollar is usually a boon for larger companies that do more exporting and own more foreign business units than smaller competitors.
Big companies also often do better as interest rates rise, as they have in recent weeks, in part because these companies generally have stronger balance sheets and better access to the capital markets than many small companies, known as small caps. Many big companies have used healthy earnings of the past few years to reduce debt and improve their balance sheets, while boosting dividends and repurchasing their sagging shares. During the second half of the 1990s, a number of big stocks were considered "must own". Back then, investors subscribed to the thesis that scale and pricing power would help big companies - particularly big technology companies - post ever higher profits.
After the stock bubble popped and the economy sputtered, however, investors plowed their money into then-inexpensive alternatives like small-cap stocks, midsize stocks and real-estate investment trusts. These shares benefited as the economy came out of recession, because small companies saw their profits surge more quickly than those of sprawling enterprises.
Over the past five years, the Russell 2000, a yardstick for small-stock performance, is up more than 58%, compared with 6% for the Dow industrial average, which tracks 30 of the nation's biggest public companies. At the same time, many believe the U.S. economy, which has been robust in recent quarters, will start to slow during the second half, partly because of 16 interest-rate increases by the Federal Reserve and because of the toll a slowing real-estate market and higher energy prices will take on consumers.
Just as investors typically flock to smaller, nimbler companies as the economy rises from a downturn, they often shift to shares of bigger, safer companies in a cooling economy. Hedge funds continue to focus on smaller stocks, but some, such as Appaloosa Management, with about $3 billion under management, have been buying up brand-name big stocks in recent months, sensing value in those shares.
Big stocks are attractive on various valuation metrics. The S&P 100 trades at 14.8 times its components' estimated pershare earnings for the next year, and has a dividend yield of more than 2%. By comparison, after hitting an all-time high, the Russell 2000 trades at more than 24 times expected earnings for the next year and sports a dividend yield of just under 1%. Historically. megacaps have traded at richer price/earnings multiples than small stocks.
"Given valuations and yields, I think the case for large caps is as strong as it's ever been," says Patrick Dorsey, head of stock analysis at Chicago researcher Morningstar Inc. "At this point, it's not unlike the case for small caps and REITs back in 1999 because they were just too cheap. It may take a dip in the economy for investors to begin to search for safe investments in the large-cap world, a development that would help these bigger companies extend their performance.
Birchtree says this is just basic information that I happen to agree with - I've been located 100% in the C fund and I'm there for a reason - I might be early but in the meantime having the opportunity to accumulate more shares during this market volatility is a plus. Please use due diligance.
The Wizard doesn't like anything that is not gloom and doom and he can just KMA. Have you ever noticed he doesn't post a position in anything - just runs the yak. But regardless, he still provides a value added component to the board. As always,
Dennis - permabull #1
