Why It Doesn't Pay to Buy Tech's Big Boys

It could be argued that it makes no sense to take on single-stock risk if the stock in question can't beat its sector index. A case in point would be the technology sector.

In the last three years, investors have not been rewarded for the extra risk taken by owning individual large-cap tech stocks, particularly the largest.

The chart below compares the biggest Nasdaq tech stocks, along with IBM (IBM - commentary - Cramer's Take), to the iShares Dow Jones U.S. Technology Sector Index Fund (IYW - commentary - Cramer's Take).

All of the stocks charted are what are referred to as mega-cap stocks -- companies greater than $100 billion in market cap (Dell used to be at $100 billion, but it's now back down to $82 billion). There are 18 companies in the S&P 500 with a cap greater than $100 billion. Of them, 13 have lagged their respective sectors over the last three years. None of the five that beat their sector was a tech stock.

All parts of the market have their day in the sun; for mega-caps, that day was during the late 1990s. Since then, small-cap has outperformed large-cap.

There is some market history behind this idea: large-cap typically outperforms as a bull market matures. Admittedly, the last few years have been unusual as small-cap has led, yet we still may have a bear market sooner, rather than later, as the current cyclical bull is long by historical standards.

The Big Names in Tech vs. the Sector Over the past three years, Microsoft, Intel, Cisco and Dell have trailed their sector, as represented here by ETF IYW.

Source: BigCharts.com

At some point in the future, mega-caps will provide leadership and it will make sense for the average cap size of a diversified portfolio to be larger than the average of the S&P 500, which is $90 billion. So at some point taking single-stock risk in this part of the market will be rewarded, but I do not see any immediate visibility for this now.

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At the time of publication, Nusbaum was long iShares Dow US Tech, Dell and Google in client accounts, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.