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Strategies & Market Trends : Gorilla Game Investing in the eWorld

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To: Mike Buckley who wrote (805)	11/23/1999 3:47:00 AM
From: Bruce Brown	Read Replies (1) of 1817

Thanks for sharing the Small-Cap tools that you use Mike. I wanted to talk a little bit about small-cap/large-cap stocks since the discussion has come up. Not in terms of PEG's or other valuation tools, but in terms of cyclical valuation that the market decides to give to the small and large companies. The last 'hot' period for small-caps was the end of '89 to '93. I had a couple of small-cap mutual funds that really outperformed. Certainly, we have plenty of patient investors waiting for that cycle to come into 'favor' again. The small-caps really haven't been such dismal performers (doubled in the past five years which is certainly acceptable). It's just that the S&P 500 market leaders have done so darn well. Many have been very surprised by the strong double-digit earnings gains for large companies even though we are already nine years into an upward economic cycle. Thank you technology! All the data that I have read points out that the average large-cap company over the last several quarters has seen earnings year over year growth in the 12 - 15 percent range. That's significant and only points out the average large-cap company. Many others are showing record profit margins and astounding strong growth for this point in the cycle. During this same time period and economic cycle, the data shows that the average small-cap company has experienced deceleration in earnings growth. Small-cap average growth over the last several quarters has been 5 - 7 percent while the large-cap average has been 12 - 15 percent. In past history, small-cap earnings have done well when the economy is strong. However, this time the case is appearing to be different. Once again, these are all for the average stock, but I think it points out a particularly strong case for why the 'market' has decided to reward the 'average' large-cap with valuations that have rewarded investors more than what the valuations of the 'average' small-cap have done during this period. Earnings growth drives the valuations and if the trend continues for the large-caps, then we will see the continued reflection in the valuations going forward. BB

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