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Stock Strategist

Small Caps for the Picking

As the big boys gain favor, it's time to look for small fry.

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As regular Morningstar readers know, we've been pounding the table for high-quality large caps for quite some time now. Lo and behold, it seems that the tide may finally be turning: Morningstar's Large-Cap Index is now ahead of our small-cap index both year-to-date and for the trailing year. Over the past three months, in fact, small caps have lost almost 12%, while large caps have held up pretty well, with a 3% loss.

This is a really great development for a couple of reasons. For one, it means that almost two years after initially advancing the notion that lower-risk, high-quality large caps were cheap relative to generally riskier small fry, I might finally be right. (Long stretches of looking dumb are an occupational hazard in the stock analysis profession.) But even better, the poor recent performance of small caps means that, in typical fashion, Wall Street has been throwing the baby out with the bathwater, and there are now some very interesting smaller companies that are cheap enough to buy.

Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.