The interesting question is why has market sentiment swung to favor the large caps? After all, small cap names have performed admirably during the past 5 years. While the S&P 500 lumbered along, pretty much flat for half a decade, small cap stocks were up 10 to 14% per year (if you avoided the tech-heavy growth stocks). While taking risk paid off for most of the past three years, we’re starting to see more conservative portfolios do better. The knee-jerk conclusion is that a market downturn is around the corner and the market is running for cover, but the bond markets are telling a different story (at the moment).
An equally compelling argument could be made that with classic growth companies like Anheuser-Busch attracting value mavens like Warren Buffett, Longleaf Partners’ Mason Hawkins, Oakmark’s Bill Nygren, and the gigantic American Fund’s money machine, maybe old-fashioned “growth” is the new value? Chris Davis (Davis NY Venture) and the Dodge & Cox fund complex have bought into Wal-mart. Buffett converted his Gillette holdings into Procter & Gamble shares, and still has his Coca-Cola stake. Pepsi, meanwhile, is attracting more of the American Fund dollars.
These legendary value investors haven’t drifted away from their value disciplines. Rather, these legendary growth stocks have drifted down into value territory, and investors are picking up their shares on the cheap. Private equity funds are also buying, and management takeouts suggest insiders think there is upside as well. Could it be that before the bell rings on this bull market, these stocks will see their day in the sun?
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
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