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.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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