Then Again Maybe Small Stocks Aren't Bargains

Even as investors steamroll from large into small-cap stocks, some measures suggest this relentless market "rotation" might have shaky footing.

Some valuation gauges indicate stocks with small capitalization, or market value, are a good deal relative to big-company shares.

But by other measures, large caps are cheaper. Consider price-earnings or PE ratios: The Standard & Poor's 500 index of big stocks trades at 24.4 times current earnings, versus 31.6 percent for the S&P 600 small-cap index. (Small-caps are expected to grow earnings faster.)

The large-caps are priced at 17 times free cash flow (another measure of profitability), versus 22.5 for small-caps.

And the S&P 500 firms trade at 6.2 times book value (company assets minus liabilities), versus 6.4 for the S&P 600.

"I certainly would not want to get out of large caps and into small caps," says Sung Won Sohn, economist at Norwest in Minneapolis. "I'm concerned about the herd instinct. Everyone now is moving into small caps, so temporarily there will be faster gains in that area, but sooner or later fundamentals will win out and large caps will prevail."

The bottom line may be that all stocks are high. "I would say there is overenthusiasm about stocks generally," says Michael Metz, chief investment strategist at Oppenheimer & Co. in New York.

You've read  of  free articles. Subscribe to continue.
QR Code to Then Again Maybe Small Stocks Aren't Bargains
Read this article in
QR Code to Subscription page
Start your subscription today