US Mega-Caps Look Set To Outperform As Valuations Diverge

US Mega-Caps Look Set To Outperform As Valuations Diverge

In an across-the-board great year for equities, small-cap and value stocks outperformed in 2013 to the point that even Apple Inc. (NASDAQ:AAPL) starting showing up on some analysts lists of ‘value stocks’. Simple regression to the mean arguments would argue in favor of large-cap companies in 2014, but the growth of activist shareholders and the money flow story give investors more reason to be interested in large domestic firms.

“History is not always a perfect guide, but a variety of factors argue convincingly for large caps over their smaller cap counterparts after several years of small cap outperformance,” writes Citi analyst Tobias M. Levkovich. The largest 25 companies on the S&P 500 (INDEXSP:.INX) are trading at about a 10% discount relative to the index as a whole, and small-caps in general have a higher PE multiple than you might normally expect.

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Shareholder activists taking on Mega-Caps

A similar argument could be made about European equities, but shareholder activists create a very real difference between the two markets. “We suspect that the US experience may be a bit different given the rise of shareholder activists who have challenged the boards at