No. 1 companies can slow simply because of their size. If a company has 1% of a market, the business can quickly double its share. But a company that commands 51% of a market cannot possibly double its share. "When a No. 1 company becomes so huge, it is tough to move the needle anymore," says Peter Sorrentino, portfolio manager of Huntington Real Strategies (HRSAX).
As coal prices rose in 2011, many investors gravitated to Peabody Energy (BTU), the biggest producer in the sector. But Sorrentino preferred Arch Coal (ACI), a smaller competitor. "Major institutions tend to buy the biggest, most liquid names," says Sorrentino. "That often pushes up the values too high."
A die-hard value investor, portfolio manager Tom Forester often favors the No. 2 names. Recently he shied away from Procter & Gamble (PG), the top dog in consumer staples. Instead, he preferred Kimberly-Clark (KMB), the maker of Kleenex. "Kimberly-Clark sells at a discount to Procter & Gamble and is growing faster," Forester says.
In recent years, Forester has often preferred Target (TGT) over top dog retailer Wal-Mart (WMT). Trying to gain an edge, Target has lowered prices on food, helping to boost sales. Both retailers sell for similar price-earnings ratios, but Target is reporting faster earnings growth.At the time of publication, Luxenberg had no positions in stocks and funds mentioned.