the S&P 500 index is a blend of Large Cap Value and GrowthThere are several potential definitions of stock styles, but in order to keep this easy to understand and use, we will think about it this way. We make incremental adjustments to the style of stock at the appropriate times
To decided what type of company you are looking at, think of what they do with their dividends, or in other words when they earn money and finish paying their bills what do they do with it?(these are called retained earnings.) A value stock will usually pay them out as a dividend to their shareholders.PepsiCo for example, has paid out almost a 3% dividend for many years in a row.If you think about that, in today’s investment environment, that is an excellent fixed rate return.Other examples of Value stocks companies are home depot, General Motors, Coca Cola and General Electric.
What is a Growth stock?
proper stock management is much like managing gear ratios in a car.Growth Stocks are typically the ones that will not pay out a dividend to the shareholder, but take the retained earnings and put it into Research and Development.They have to in order to be competitive and Grow.These are easy to find, just look at the electronic devices you have in your home or office, Hewlett Packard, Dell, IBM, Apple, and so on.
What is Market Capitalization?
That is simply the size of the company, how much is the company worth if you add up all of their assets?
Large Cap – the Company is worth more than $5 billion.
Mid Cap – the company is worth $1 to $5 billion.
Small Cap – the company is worth less than $1 billion
This is the key to what a good Advisor does;
When the market is moving down, we move our clients’ portfolios incrementally towards large cap value.
Easy Big FellaHow we take advantage of Bear MarketsThe reason we do this is that when we have a Bear market scenario, those companies are a bargain, and their products will always be in demand.Think about it this way, did you drink any less Pepsi or Coke in 2007 through 2009?Probably not.Did contractors use less building materials from places like Home Depot?Nope, they were busy remodeling homes instead of building new ones.When the market is dropping, we are moving that direction because those companies are going to rebound and have very little danger of any serious financial difficulty.
in a Bull Market Scenario, we are moving in the opposite directionChargeDuring a Bull Market we are moving towards small cap value and Large Cap Growth.The reason we do this is simple, those are the stocks that lead out during a recovery.In a Bull Market Scenario, the Small Cap Value stocks, which are typically more leveraged and are often suppliers to the large cap stocks, are making the most profits.If you study the trends, you see that they clearly outperform the other markets sectors when a recovery is underway.Large Cap Growth stocks are often those that are consumer discretionary items, or items that are put off if the budget is tight.When there is a recovery, purchases which have been put off now may be purchased.
An example of why down markets, properly handled are opportunities.
Analysis of the Morningstar Andex Chart reveals excellent insightsWe are not market timers or day traders, but when a stock portfolio for the client is appropriate, we do use stocks of varying market cap and style, making incremental adjustments along the way to use market volatility to our clients advantage. Strange as it may sound, we love down markets and our clients do too, because we understand how it brings opportunity. Let me give you an example, Large Cap Value Stocks are the very large companies, that can cover many different market sectors and generally pay strong dividends. In a falling market scenario these types of stocks prices drop many times more quickly than their earnings and it becomes a good value. Also down markets can often provide tax saving opportunities. I had a client during spring of '09 and he took advantage of the low market prices to convert several hundred thousand dollars from a Traditional IRA to a Roth IRA, he had to pay the IRS for the taxable portion of the transfer, but in the following his, by staying in stocks, his account more than recovered, and the difference was, that now, all of that money was tax free. He had just saved himself a grundle in taxes. We know what to do in down markets, and know the opportunities they provide. Preparation, that's why we and our clients love them.
What is a Value stock?
