Sizing Up The Markets

Find out which market caps performed the best in 2007; you might be surprised. Then find out how you can use this to your advantage in 2008, and get three new stocks for the New Year.

As I was reviewing the year’s market performance, I ran some tests on which market caps performed the best.

I created three screens, one with market caps less than $800 million (small caps), one with market caps between $800 million and $3500 million (mid-caps) and one with market caps greater than $3500 million (large caps). Each screen also consisted of only stocks trading over $5 with an average daily trading volume of over 50,000 shares. I then back-tested this screen over 2007 using a 1-week holding period. This allowed each screen to participate in every start period. The tests showed that in 2007, large caps beat small caps by wide margin: up 12 percent for large caps versus -4 percent for small caps. This is significant because it marks the third year in a row where large caps have outperformed small caps and mid-caps.

In 2000, the “smalls” performed the worst, putting in a performance of roughly -10 percent with “mids” doing the best. However 2001 saw the small caps turnaround and beat everything else, producing a roughly 30-percent gain. The large caps did the worst at roughly -10 percent. 2002 saw all the market caps come in virtually the same, and they all did poorly like the market. But 2003 saw another small cap out-performance with a 70- percent gain in comparison to the mid-caps and large caps at 45 percent and 38 percent respectively. 2004 saw the different market caps come in virtually tied again—although the edge did go to the small caps. 2005 saw the edge this time go to the large caps at approximately at 12 percent in comparison to the small caps’ 4 percent last-place finish. An 8-point difference doesn’t seem like a lot, but that is two times better than the small caps. 2006 was a closer contest, but again the edge went to the large caps at roughly 19 percent, with small caps and mid-caps trailing at 18 percent and 16 percent for second and third place. 2007’s performance produced a clearer cut winner though, with large caps doing 12 percent while small caps lagged behind at -4 percent. Mid-caps finished in between at 4 percent.

So does that mean you should abandon small caps in favor of large caps? No. But should you have a mix of everything? Absolutely! Remember, some years one market size will outperform everything else—sometimes by significant margins. But if you have exposure in all the caps, you can make sure you’ll participate in the winningest group no matter what.

But since large caps were the hands down winner, let me start you off with three large cap stocks with a Zacks Rank of a 1 or 2 (i.e., strong buy or buy ranking).

FLS Flowserve
RIMM Research In Motion
NOV National Oilwell Varco

See what other large cap stocks have the best Zacks Ranking, and see all the best Zacks Rank stocks regardless of market caps. Best of all, build your own screening strategies and see how successful they are. Make 2008 your best year ever, and start by knowing which screening strategies work and which ones don’t. You can do it. Sign up now for your free trial to the Research Wizard and start your New Year off right by making decisions today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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