Daily Gains Letter

Why You Need to Stick with the Big Guys Right Now

By for Daily Gains Letter |

Proven Companies the Place to Be at This TimeFor investors in small-cap stocks, this year has been quite a different experience from 2013, when the sector was raging and sizzling on the price charts.

Small-cap stocks are the laggards this year, with the benchmark Russell 2000 down nearly 14% from its peak and established in a bear market. The selling may be somewhat extreme at first glance but consider that the Russell 2000 surged an excessive 33% in 2013.

The reality is that gains like what we witnessed in 2013 were unwarranted; they were driven solely by the easy monetary policy put forth by the Federal Reserve and excessive froth in the stock market. We are now paying for the euphoria small-cap stocks encountered in 2013.

Now, while I continue to feel small-cap stocks are excellent longer-term plays, the short-term looks weary, given the technical breakdown on the chart of the Russell 2000.

Dumping higher-risk small-cap stocks is clearly the line of attack this year. But if the economic renewal holds into 2015 and the global economy doesn’t tank, we could see small-cap stocks rally next year. Keep this thought in mind, but know that at this time, it’s safer to shift your money to the large-cap or blue-chip stocks that have been battered this year.

Buying mature, consistent large-cap stocks on weakness makes sense as these companies have proven themselves to be steady players over time.

Think about it this way: Small companies will tend to struggle if the economy declines. Compared to the larger companies that can deal with several quarters or even years of underperformance, small-cap stocks would have a much more difficult time.

For instance, during the recession in 2008, large-cap General Electric Company (NYSE/GE) fell to the $5.00 level. Buying the stock on the weakness was a no-brainer to me, as GE has proven itself for more than a century—and in that time, the company has survived two world wars, the Great Depression, multiple stock market blow-ups, and numerous recessions. The stock traded recently at $28.00, so what a gain it has been.

Similar could be said for fast food king McDonalds Corporation (NYSE/MCD), which had been trading below $20.00 in 2003 as the company faced growth issues. Recently, the stock traded above $100.00, but has since pulled back to the $90.00 level, where I see an investment opportunity.

Other big, proven, war-tested companies that could be accumulated on stock market weakness include Wal-Mart Stores Inc. (NYSE/WMT), The Procter & Gamble Company (NYSE/PG), The Home Depot, Inc. (NYSE/HD), and Colgate-Palmolive Company (NYSE/CL).

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