Bill, thanks for the thought, buy some mid caps to offset the large
cap shorts
Bringing The World To You May 28, 1999
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STOCKPICKER'S CORNER
Portfolio Downsizing Points to Mid-Cap Outperformance
A recent article in the Wall Street Journal highlighted the
fact that some mutual fund managers are beginning to
downsize their portfolios, shifting toward the shares of mid-cap
stocks. We have heard anecdotal evidence supporting
this move, and indeed, we began favoring the mid-caps
back in February. However, recent mutual fund statistics
also support this shift. According to Lipper Inc., the me-dian
stock in large-cap portfolios, weighted by market capi-talization,
had a market cap of $58.3 billion in April, down
4.4% from the March level of $61 billion. While $58 bil-lion
is still far from the mid-cap range, we believe the
magnitude of the drop in a relatively short period of time is
largely because of the inclusion of a significant portion of
mid-cap stocks. We continue to favor the mid-cap group
and believe the relative value and strong earnings growth
that this market segment offers will continue to reward
investors while the broadening of the market plays out.
Portfolio Downsizing
After the phenomenal returns the market has generated over
the past several years, investors have become accustomed
to 20% plus performance and continue to search out growth
in an attempt to replicate these gains. However, valuations
of many of the large-cap stocks that drove this strong per-formance
already discount significant growth expectations.
We therefore continue to believe that the market has shifted
to a value bias, including mid-caps and cyclical issues, in
an attempt to find undiscovered growth. While cyclical
names may not be able to sustain earnings growth over sev-eral
years, they do offer the prospect of relative growth over
the next year or two as world growth recovers. Earnings
growth has become more important now that the market
will no longer be able to rely on a favorable interest rate
environment to drive multiple expansion. However, the days
of “buy high, sell higher” appear to be near an end. Inves-tors
are demanding that stocks offer an element of value in
addition to growth. The bear market in the Internet sector
provides a case in point. We by no means believe that large-cap
growth is dead. Rather, we see evidence that investors
are beginning to search out GARP (growth at a reasonable
price) stocks, and they are willing to consider sectors of the
market that until recently were untouchable.
Mid-Caps We Like
In order to take advantage of this shift, we have been rec-ommending
that investors consider the mid-cap sector.
Our work suggests that the mid-caps offer strong relative
growth and attractive relative valuations.
We recommend growth-oriented mid-cap names. How-ever,
we have highlighted the larger stocks, those between
$5-$10 billion in market cap, as those are the names that
large-cap fund managers are likely to consider as they
downsize their portfolios. Mid-cap fund managers have
had to buy mid-cap stocks all along, but the incremental
demand for the mid-cap segment from large-cap fund
managers will swing momentum toward this group. Larger
mid-caps that we believe are particularly attractive include
AES Corp.# (AES, $52, 1M), Biogen (BGEN, $107, 1S),
Century Telephone# (CTL, $40, 1M), Chancellor Media#
(AMFM, $52, 1H), HealthSouth (HRC, $13, 1H), Hertz#
(HRZ, $54, 1H), Lexmark# (LXK, $134, 1M), Masco#
(MAS, $29, 1M), Paychex (PAYX, $27, 1H), Tandy#
(TAN, $74, 1M), and Unisys (UIS, $35, 1H). We also
continue to recommend smaller mid-caps such as
Abercrombie & Fitch (ANF, $77, 1H), Cincinnati Bell#
(CSN, $24, 1M), Ethan Allen (ETH, $30, 1M), Interna-tional
Speedway# (ISCA, $48, 1H), Sanmina (SANM,
$72, 1H), and Tommy Hilfiger (TOM, $73, 1H), all of
which should benefit from powerful underlying themes
driving their growth. Large-cap investors wishing to
downsize but not willing to buy mid-caps may want to
consider some of the smaller names included in our Nifty
Group. BMC Software (BMCS, $45, 1H), Corning (GLW,
$48, 1H), Equitable# (EQ, $67, 1M), Federated
Depart.Stores# (FD, $53, 1H), Genentech (GNE, $86, 1M),
Honeywell# (HON, $93, 1M), Interpublic (IPG, $72, 1M),
Lowe's (LOW, $51, 1M), Marsh & McLennan# (MMC,
$68, 1L), and Staples# (SPLS, $26, 1H) are all Nifty stocks
that trade below 2.0x their growth rates and are buy rated
by our industry analysts. These smaller nifty names could
benefit from incremental buying as large-cap managers
downsize their portfolios but remain in the large-cap realm. |
