Attack Of The Mega-Caps

By Aaron Levitt | February 15, 2011 AAA

With the latest GDP numbers coming in strong and corporate earnings reports turning more bullish every day, the U.S. economic recovery is firmly underway. The Dow has rallied past the psychological 12,000 mark and the S&P 500 is up almost 6% since the beginning of the year. While the stock market party will almost undoubtedly continue throughout the remainder of the year, there are still some worries persistent in the global economy. Food inflation fears, sovereign debt issues in Europe and civil unrest in the frontier markets are all contributing to the uneasiness. However, investors shouldn't abandon stocks altogether. One group may be the best way to play the growth in 2011, and still provide some safety.

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The Biggest of the Big
Representing the very largest of the publicly traded companies, mega-caps could be the best way to play the stock markets continued rise in 2011. These firms are leaders in their respective industries and represent common household names. These large multinationals provide exposure to the faster growing nations outside the United States, but provide stable revenue streams and much stronger balance sheets. Blue chips are better equipped to handle any possible downturns in the market and their bulk offers advantages in a slowing and uncertain economy. These include their larger dividends, ability to acquire floundering smaller competitors and lower volatility.

In addition, the long-term trend of the falling U.S. dollar will help the mega-caps. A weaker dollar bestows firms selling overseas a cheaper product in local currencies. This also pads their own books when strong currency revenue is converted back into dollars. Larger companies tend to have more of their overall revenue derived from international markets versus smaller domestic firms.

Finally, on a stock metric point of view, the mega-caps are typically cheaper than their smaller peers. Large-cap price-to-earnings ratios are about 13 times trailing earnings versus about 17 times for the small-caps. For example, mega-cap oil giant Exxon Mobil (NYSE:XOM) trades at a P/E of 13.5 while smaller rival Swift Energy (NYSE:SFY) trades at a P/E of over 35.

Increasing Exposure
While most investors have exposure in their portfolios to the broad large-cap indexes such as the iShares S&P 500 Index (NYSE:IVV) ETF, taking a hedged bet on the largest of the large may make sense as there continues to be uncertainty plaguing the global economy. A simple solution could be adding the SPDR Dow Jones Industrial Average (NYSE:DIA), which tracks the Dow. However, there is more than one way to increase exposure in this area.

Both the Vanguard Mega Cap 300 Index ETF (NYSE:MGC) and the iShares Russell Top 200 Index (NYSE:IWL) offer the broadest swath of for mega-cap exposure. Both include such well known names as consumer products company Procter & Gamble (NYSE:PG) and IBM (NYSE:IBM). For investors wanting to hone in on the largest of the large, the Rydex Russell Top 50 (NYSE:XLG) may be a better choice. The fund holds 50 of largest companies in various industries. The fund charges 0.20% in expenses and yields 1.82%.

Finally, for those investors looking for single-stock allocation to the mega-caps, integrated oil giant Chevron (NYSE:CVX) trades for a P/E of around 10 and provide market-beating dividends. This $200 billion market capped company can provide exposure to relatively resilient sector of the economy.

Bottom Line
While many forecasters are predicting strong gains for stocks in 2011, there still are some dark clouds swirling in the global economy. Investors may want to consider adding a dose of the mega-caps to their portfolio. These monster blue chips offer advantages to portfolios in a uncertain economic environment. Funds like the iShares S&P 100 Index (NYSE:OEF) offer targeted coverage of the sector. (Find out the difference between mega-, large-, mid- and small-cap stocks. We show how each suits particular investing styles. Check out Market Capitalization Defined.)

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