Large caps appear cheaper than small caps

Just from my cursory examinations of the markets, it appears that large cap stocks are representing a better value than smaller capitalization issues. I am guessing the market is discounting some form of zero-growth projection in the future for a lot of these firms. One factor to remove from the analysis is government revenues – the theory would be that companies with higher exposure to government business will face pressure as deficits will force spending cutbacks.

Because of the currency differential, US stocks appear to be a better value at the moment – dividend-bearing companies can also be put in the RRSP to avoid withholding tax.

Just as the most basic example, Walmart (NYSE: WMT) is projected to earn about 8.5% of its capitalization this year – much better than sticking it in a 10-year government bond yielding 3.41%. You would think that the company would be able to scale its business appropriately if there was a recession – indeed, by looking at the stock chart you would be hard-pressed to see even a hint of an economic crisis in 2008-2009. You don’t even have to do any research – there is virtually no chance of Walmart not being able to produce profitable retail business in the medium-term future. This is contrasted with Amazon, which has to justify its valuation with huge amounts of growth over the next decade.

You will never see your investment in WMT rise by 30% in a year, but then again, you will not see it sink 30% either. It almost trades like a bond. It is a typical good “grandmother” stock.

There are many better (and smaller) examples of large cap companies that are trading at very attractive valuations, have a “moat”, and unlike Walmart, you could envision scenarios where they will warrant higher valuations.

2 thoughts on “Large caps appear cheaper than small caps”

  1. I generally keep away from the large cap multi-nationals for that reason, not too much growth left in those companies.
    Aside from one or two to anchor a portfolio and have some dividend exposure.

    But had I know on November 9th 2007 that Walmart (trading at $42.90), would be at $62 the following September, I may have been tempted. 🙂

  2. Thank you for invalidating my 30% statement!

    The other reason why I tend to avoid large caps is that there are already too many eyeballs looking at them, hence you are unlikely to find huge inefficiencies. But occasionally they present themselves. Classic example that comes to mind is McDonalds in 2003.

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