May 9th 2011, 12:46 by Buttonwood
THERE are 26 stocks in the S&P 500 with a market value of more than $100 billion. According to Morgan Stanley, such companies are cheaper than they have been, relative to the rest of the market, in the past 25 years. In practical terms, this means they stand at an average 20% discount to the market's prospective price-earnings ratio. Since March 2009, the megacaps have risen 67% compared with the rest of the market's 118%.
Similar factors seem to be at play in Europe where, according to Newton, the biggest stocks (defined as those worth over â?¬30 billion) have risen 60% since March 2009 while the rest of the market has more than doubled.
So what is going on? There is a potentially simple explanation for the underperformance since March 2009. During the crisis, investors will have flocked to the biggest names in the market for defensive reasons; once sentiment recovered, there was scope to find bargains in the small and midcap prices, some of which were priced as if they were going bankrupt.
However, that factor doesn't explain the valuation discount. there might be two other explanations. The first could be the expectation that future growth will be generated by emerging markets; while many of the megacaps are exposed to such markets, it is a relatively small part of the business. Investors may be looking for niche plays in the small and midcap areas. However, a second explanation seems more plausible. The moment when megacaps had the highest relative value was in 1999/2000 when the TMT stocks (tech, media and telecom) were much sought-after. Now, with the odd exception such as Google and Apple, the megacap sector looks less exciting (banks, energy companies, pharamaceuticals). These may be solid businesses but it is hard to spin a story of endless double-digit profits growth.
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About Buttonwood's notebook
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them.
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