Investing large late in the cycle
Joel Dresang: Steve, we talk about diversified portfolios with a mix of stocks and fixed-income investments. Today, I want to talk about the stock side – and particularly the large-cap stocks. So, first of all, how about a definition?
Steve Giles: Well, Joel, large-cap stocks are a way to define the market capitalization of companies with over $10 billion in assets. Large-cap stocks are going to be companies that you and I are familiar with, that we have interaction with every single day. Think Microsoft. Think Johnson & Johnson. Think GE.
The way that you determine the market capitalization of a large-cap stock is to multiply the number of shares outstanding by the price of that stock.
Joel: So, Steve, how are large-cap stocks doing so far this year? We’re in the fourth quarter of 2014.
Steve: Joel, large-cap stocks are up across the board, whether you’re looking at the value sector, which would be comprised of such things like financials and industrials, or the growth sector, where you’ve got healthcare and technology.
Joel: Why is that?
Steve: Well, Joel, a lot of it has to do with where we are in the business cycle right now. Consider that large-cap companies typically do better when you enter into the more mature phases of recovery. Small-caps, throughout the year, have been passing the baton back up to the large-caps. And it’s the large-caps that investors tend to gravitate towards at this point in the business cycle.
Joel: So, Steve, we’re seeing corporate profits at all-time highs. How is that affecting large-cap stocks?
Steve: Well, Joel, I think it’s getting investors more interested. Not only do you have companies beating and exceeding analyst expectations, but these are large companies that typically pay dividends. If I’m a conservative investor, I’m looking for a way to improve my income or maybe hedge inflation longer-term, I like the idea that a large-company conservative stock is going to pay me a dividend.
Joel: Steve, what kind of drawbacks do large-cap stocks have?
Steve: Joel, large-cap stocks don’t have the ability to be as nimble as small-caps, which is why small companies tend to grow a little bit faster when we’re emerging from those recessions. We’re at the point in the business cycle right now, where the baton has passed to large-caps. We’re in a much more mature area of this recovery.
Joel: What about international stocks? We haven’t talked about that at all. How do they fit within large-cap versus small-cap?
Steve: I think that large-cap stocks are a great way to give conservative investors exposure to some international opportunities. Consider that a company like GE garners more than half its profits overseas. If you want to have exposure to a wide range of global opportunities, large-company stocks are going to give a lot of investors that opportunity.
Joel: So you said that we’re at a mature phase in the business cycle. That tends to favor large-cap stocks. Does that mean I should get out of small-caps?
Steve: No, actually not. The reason why we like to have a balanced portfolio is you never know which category is going to do best moving forward.
The reason why understanding where we are in the business cycle is important is because it helps us to favor one area over the other. At this point in the business cycle, large-cap stocks is that area where we’re tending to favor our clients’ investments. I think large-cap stocks should be the cornerstone of most well-diversified portfolios.
Steve Giles is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted Nov. 18, 2014)
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Watch Brian Kilb talk about stock market capitalization in “Sizing up stock investments” and “Small-cap investments: Nimbler, more volatile.”