In 2011’s large cap vs. small cap stocks battle, bet on bigger names

After a decade of under-performing the Russel 2000, 2011 just might stack up to be the year of the large-cap stocks. Here’s why.

One of the fundamental differences between successful investors and mediocre investors is the ability to protect assets. Even with the S&P 500 returning 12 percent last year, trillions of dollars sat languishing in money-market accounts earning interest rates around 1 percent.

The wealthy are more keen on protecting their capital than they are on putting it in jeopardy. That’s what made them rich in the first place, and it’s also why many analysts are calling for 2011 to be a banner year for large-cap stocks. Signs are already surfacing that money’s flowing back into the markets after an extended period on the sidelines.

Since early December, Americans have moved $83 billion out of money market accounts. A lot of that money ended up in stocks. According to the Financial Post, investors poured $23 billion into mutual funds in January. That was the biggest monthly inflow since February 2007.

Wealthy investors are also ditching bonds in favor of stocks. Larry Palmer, a managing director for Morgan Stanley Smith Barney Private Wealth Management Several, tells the Post that several clients sold half their bond portfolios over the past two months and invested the proceeds in large-cap dividend-paying U.S. stocks.

Big Money likes big margins of safety, and rock-bottom valuations have a lot of large-cap stocks looking attractive right now. Big Money’s also particularly adept at recognizing when shares are under-valued.

“Ten years ago, if you were looking for relatively low valuations, your search would have led you to smaller stocks, and you would have enjoyed a decade of outperforming the broad market,” writes Matt Koppenheffer at “Right now, larger stocks carry the more attractive valuations – CVS (NYSE:CVS) has a P/E of just over 13 and Ford (NYSE:F) changes hands at less than nine times its earnings – and I think will enjoy better returns when the trend reverses.”

Here are three more reasons 2011 just might stack up to be the year of the large-cap stocks:

1) A crumbling dollar. The rapid decline of the dollar has shares on American exchanges looking cheap. Foreigners who buy in now, could reap gains in stock prices AND currency appreciations if and when the Fed starts tightening interest rates. Mike Hawkins, head of private clients at Evans and Partners, went so far as calling it a “once-in-a-generation opportunity” for Australian investors.

2) Margin of safety. The political turmoil in the Middle East could put long-term pressure on stock prices. In general, large cap stocks lose less than small cap stocks as investors shift money into safer assets during periods of uncertainty.

3) Large caps are “as cheap as they ever get.” “These stocks are not just a little cheap, they are almost as cheap as they ever get, relative to the rest of the market,” Jeremy Grantham, chief investment strategist for Boston-based Grantham, Mayo, Van Otterloo & Co., tells the Post. The blistering gains we’ve seen in small-cap stocks have lured investors away from big companies with great revenue streams, and this just might be the year when that trend reverses itself.



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