Q: Which is a better stock investment, investments in larger companies, or in smaller ones?
A: At different times the answer would vary. Sarah Hansen of Morningstar recently wrote, “The stocks for small companies are at some of their cheapest valuations in recent history. After years of underperformance in this area, this could be a sign that it’s time for investors to back up the truck.”
P/E ratio — the price of a stock divided by its earnings — is a common metric to determine the value or priciness of a stock. The higher the P/E ratio, the more expensive the price.
“Relative to history, U.S. small-cap stocks are cheap. The S&P 600 Index’s forward price-to-earnings (P/E) ratio was 12.6 as of November 21, 2023. This ratio had only dipped below 13 twice since the turn of the millennium — in 2008, during the global financial crisis, and in 2011, when sovereign debt concerns weighed heavily on global stock valuations.”
Large cap stocks have a market capitalization of over $10 billion.3 Small cap stocks have a market capitalization of $250 million to $2 billion. The size difference brings different dynamics, risk levels, and market performance when economic circumstances change. In general, small cap stocks bring the potential of more risk and possibly more reward. Tesla was a small cap stock early on. Investors who put money into that small relatively unknown company — but one that had a unique proposition — made a lot of money. But if Tesla had failed the opposite would have been true.
Conversely, AT&T would be hard pressed to double its value quickly (like Tesla) but it also is highly unlikely to go bankrupt. Its large size restricts both upside and downside. A conversation with your trusted advisor should help you determine a prudent choice of positions for your portfolio.
Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (“MAS”), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. MAS and Aileron Investment Advisors are not affiliated companies. AEWM and Aileron Investment Advisors are not affiliated companies.
This is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Investing involves risk, including the potential loss of principal. It is not possible to invest in an index. Past performance does not ensure future performance or results.
