These days, a good number of analysts will tell you to forget about expecting much pop from the large stocks at the top of the market. The megalithic GMs and GEs out there are in for something of a slowdown in profits, they’ll say, not good news when you consider that earnings are the engine that runs a stock upward. They’ll also note how large cap stocks (companies whose number of shares multiplied by current stock price is in the tens of billions) are bloated after a fantastic run last year and early in 1998. So, it’s only logical to expect the stocks of bulging companies atop the S&P 500 to take a breather after three monstrous years and a 12% gain by early June.
Bond Procope Capital Management portfolio manager Richard Garriques says there’s gold in the market, however, if you dig deeper. Garriques, who chooses growth stocks for the New York money management firm, has heard the predictions. But at the same time, he has also found that midcap stocks, the shares of companies a little smaller than the Mercks, Fords and IBMs out there, should offer more for the money going forward.
Start with earnings growth. By analysts’ estimates the S&P 500 index of large cap stocks is slated to boost earnings 20.1% this year. Look at the S&P 400, the index that tracks midcaps, and you see a veritable boom of 26% growth this year. “You can’t expect a GE to grow over 20% year after year because it’s so incredibly large,” says Garriques. “But smaller companies have a smaller base, so with the economy in good shape and inflation low, it’s not unreasonable to see them outperform the big boys.” Midcaps are more of a bargain, too. And despite the higher growth, midcaps aren’t much more expensive than large caps. As of press time, the average price-to-earnings (P/E) multiple projected for the S&P 500 for 1998 was 22.86; meanwhile the S&P midcap 400 was only a bit more at 23.44.
It’s that twofer — higher earnings growth at a comparable price — that has blessed the midcap portfolio that Garriques and his boss, Alan Bond, run for the firm’s institutional clients. In 1997, only its second year, this portfolio under Bond Procope’s management rose 43.16%, compared to 33% for the S&P 500 and 32.24% for the S&P 400. Year to date, as of June 1, it was up 2.6%, compared to 12.4% for the S&P 500 and 7.4% for the S&P midcap 400. And Garriques can also boast of a fine showing in a BLACK ENTERPRISE Investment Roundtable held in October 1996. Those picks, which included names like WorldCom, Westinghouse, Tellabs, Safeway and Merck, blazed to a 41.83% gain in 1997.
Garriques limits his sights to companies with between $500 million and $12 billion in market cap. From there, he’s looking for earnings growth of 15% or more per year. And then, by scanning for stocks with a return on equity (ROE) of 15% or greater, and a debt-to-capital ratio