Big Tech Stands Tall - TheStreet

Big Tech Stands Tall

The outperformance of bigger companies stands to continue into next year.
Author:
Publish date:

SAN FRANCISCO -- The meteoric rise in

Apple

(AAPL) - Get Report

and

Google

(GOOG) - Get Report

shares is waning, but investors still have time to find stocks with strong growth characteristics.

Despite recent market declines, large companies -- and tech firms in particular -- still offer solid earnings growth potential, and their respective stocks are likely to offer better returns than smaller companies for the remainder of the year.

The economy appears to be entering a phase of slower growth that favors large companies, especially those selling gear to run the Internet, as well as those using it to sell goods and services. Many also stand to benefit from greater exposure to overseas markets that are growing faster than U.S. markets.

These advantages have already shown up. Large companies have outperformed their smaller counterparts this year, reversing a multiyear trend that favored smaller, nimbler firms growing at breakneck speed while the economy was regularly logging annual growth over 3% or better.

The

Dow Jones Industrial Average

, for example, has fallen from its highs for the year, but it's still up 6%. By contrast, the

Russell 2000

index, in which the median market cap is $663 million, is flat for the year.

"Small-cap value stocks have been the story of the last seven years, but that story has started to break," says Phil Mackintosh, a portfolio and derivatives strategist with Credit-Suisse. "At the end of an economic expansion, our Global Strategy team shows that large-cap stocks tend to outperform the market."

Much of this year's gains are concentrated in the hands of a few large tech companies. According to Standard & Poor's, three highfliers -- Apple, Google and

Microsoft

(MSFT) - Get Report

-- accounted for 61% of the S&P 500's gain in October and 18% of it since the beginning of the year.

What's more, these three companies accounted for 27% of the earnings per share generated by a basket of stocks mirroring the S&P 500.

A concentrated portfolio holding the six companies that are most heavily weighted in the Nasdaq 100 index (the top companies by market cap), would have returned over 30% to investors this year, according to Credit Suisse. This towers over the roughly 15% return for the total index, which tracks the largest non-financial firms listed on the

Nasdaq

.

The disparity stems in part from the weight that the Nasdaq 100 Index gives to Apple and Google, whose stocks have risen roughly 100% and 35%, respectively, this year despite the recent pullback in tech stocks.

But it nonetheless underscores the outperformance of large stocks, which are typically less risky than small stocks, giving companies like Apple, Microsoft and

Cisco Systems

(CSCO) - Get Report

better risk-reward characteristics.

Mackintosh believes the outperformance of large companies could continue into 2008.

The tech sector still holds opportunity for growth investments despite persistent fears that U.S. businesses are cutting spending on hardware and software. Many companies could benefit from the worldwide buildout of the Internet and the use of the Web for selling to consumers. Credit Suisse spotlights Cisco Systems, Google,

Amazon.com

(AMZN) - Get Report

and

eBay

(EBAY) - Get Report

as companies with high growth-oriented characteristics.

Credit Suisse does and seeks to do business with companies covered in its research reports."

Also,

Intel

(INTC) - Get Report

and Microsoft should benefit from sales of PCs used to connect to the Internet.

An exchange-traded fund like

PowerShares QQQ

(QQQQ)

, which is based on the Nasdaq 100, offers exposure to many of these stocks, and is weighted in favor of the highfliers.

CreditSuisse's Global Strategy team has told investors to trim their tech holdings to take profits as potential gains may already be partially reflected in share prices. But they still recommend that investors remain overweight in the tech sector.

Outside of tech, investors can find solid growth characteristics in energy and commodities firms like

Transocean

(RIG) - Get Report

,

Noble

(NE) - Get Report

,

Freeport-McMoRan

(FCX) - Get Report

and

Newmont Mining

(NEM) - Get Report

, according to Credit-Suisse.

These companies should benefit from continued investment in efforts to tap hard-to-reach oil and gas deposits, as well as the need for more materials to build bridges, hospitals and other public infrastructure across the world. Engineering giant

Fluor

(FLR) - Get Report

also fits into this category.

Mackintosh doesn't believe that the outperformance of a handful of large companies this year suggests that investors should build their portfolios on a small basket of stocks. He continues to advocate diversification to avoid steep losses.

For diversified exposure to large growth companies, Macintosh recommends exchange traded funds like iShares S&P 500 Growth Index

(IVW) - Get Report

and iShares Russell 1000 Growth Index

(IWF) - Get Report

.