Charts: Are Large Caps Attractive?

This chart plots price changes in large company stocks relative to small company stocks VS. the difference in earnings yields between large and small stocks (large measured by the cap weighted earnings yield on the S&P 500, and small measured by the median earnings yield in the Valueline universe of 1700 stocks.) The simple rule of thumb in mind is that the wider the gap between the earnings yields, the more opportunity for outperformance in either large or small cap stocks relative to each other.

The chart doesn't get included in our regular subscriber updates, because frankly it is a little boring - slow moving and rarely gives a big edge. Over the coming months, this may be the only time it gets pulled out of the filing cabinet for the next 20 years, but today it is illustrating an incredibly rare divergence between the yields on large vs small stocks. What was an extreme reading in favor of small caps in 2000 has become an extreme reading in favor of larger stocks. The reading is more extreme in favor of large caps than any time since the early 1980s, and that instance played out favorably in favor of large company stocks over the next several years.

Mark Dodson, CFA

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