The market’s recent pullback certainly seems warranted given the lack of positive news flow both economically and fundamentally. The euro zone continues to struggle in dealing with its debt issues, corporate earnings reports for the second quarter have been less than exciting and policy uncertainty out of Washington is weighing negatively on consumer and business sentiment. This seems like a replay of last year. In spite of these headwinds the S&P 500 Index remains higher on the year by 7.9%. From a pure technical standpoint, the S&P 500 Index does remain in a short term uptrend beginning in early June but in a downtrend since May as noted in the below chart. There is resistance at the 1,374 level and support at the 50 day moving average of 1,335. Additionally, the recent decline has not occurred on large volume.
Caution does seem warranted for a number of reasons as outlined in earlier posts. However, when the market does begin to rally it could be mega cap stocks that lead the market higher. A recent Fidelity report, “Capitalizing on Inefficiences in Mega Cap Equities,” highlights some positive attributes of these larger cap equities. In evaluating mega cap stocks, Fidelity used the 200 largest stocks in the Russell 1000 Index. On a relative valuation basis, compared to the other 800 stocks in the Russell 1000 Index, the mega cap stocks are trading at a 26% discount to the midcap stocks of the Russell 1000 Index.
On a P/E basis the mega caps are trading at valuation levels last seen in late 1991. Further, on a forward P/E basis, mega caps appear more attractive than their midcap counterparts.
In looking at performance, mega cap performance has trailed significantly versus the midcap stocks.
And lastly, investors receive attractive dividend yields from these 200 mega cap holdings. The mega caps are yielding over 4% while the mid cap stocks yield just under 2.5%.
Volatility in the equity market seems more the norm today; however, investors seeking equity exposure might find an opportunity in these larger capitalization stocks. In Fidelity’s report they evaluated the top 50 mutual funds and found the mega cap stocks were consistently under owned by most active managers.
Capitalizing on Inefficiences in Mega Cap Equities
Fidelity Investment Insights
By: Matthew Fruhan, Naveed Rahman, Alex Devereaux