Tailwinds For Megacaps in 2005?

By Bill Gerdes Does the dawn of the New Year offer better prospects for the biggest of the big-cap stocks, or megacaps -- specifically, the S&P 100-stock index? Many market observers expect large-caps to outperform in 2005, after trailing small-cap stocks in recent years.

The S&P 100, often known by the ticker symbol under which its index options trade -- OEX

-- measures large-cap company performance. This market-cap-weighted index is a subset of the S&P 500-stock index, and is made up of 100 major, blue-chip companies across diverse industry groups. The S&P 100's median market cap is $31.6 billion, vs. $10.4 billion for the S&P 500.

Standard & Poor's believes the S&P 100 will outshine the S&P 500 in a few key measures over the coming 12 months. Based on the STARS rankings of the stocks in the respective indexes by S&P equity analysts, the S&P 100 has an average STARS ranking of 3.84 (out of 5), compared with 3.63 for the S&P 500. The megacap index also has a slightly higher

dividend yield than the S&P 500, 2% vs. 1.8%.

DIMINISHED ADVANTAGE. The megacaps' advantages bode well for this year, in S&P's view. "Over the next 12 months, we believe the megacaps could outperform the large-caps because of overall STARS rankings and dividend yields," says Sam Stovall, chief investment strategist of Standard & Poor's Equity Research Services.

Despite these advantages, the S&P 100 may not enjoy a multiyear lead over the S&P 500, according to Stovall, as the broader, large-cap index shows higher earnings potential and less

volatility. He believes the S&P 500 offers more favorable earnings prospects than the S&P 100, based on Wall Street projections. The Street projects a five-year earnings growth rate of 12.1% for the S&P 500, vs. 11.3% for the S&P 100.

The large-cap index also appears to have a lower risk profile than the megacap index, in Stovall's view. With a wider base likely to dampen volatility, the S&P 500 has a lower 15-year standard deviation than the S&P 100, 17.4 vs. 22.

INVESTMENT PLAYS. Interestingly, the two indexes have similar overall valuations. The S&P 100 has a 16.3

price-earnings ratio on projected 12-month operating earnings, while the S&P 500's p-e is 16.5.

How can individual investors play the megacap index? Few retail-investment vehicles exclusively track the S&P 100. They include an exchange-traded fund that tracks the S&P 100, iShares S&P 100 Index (OEF), and a mutual fund, North Track S&P 100 Portfolio (PPSPX ). Gerdes is an associate editor for Standard & Poor's Global Editorial Operations

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