April 29, 2007 7:48 PM
Is It The Right Time for Mid-Cap?
Interesting WSJ article that pitches domestic mid-cap stocks for its timeliness. However, the PEG ratio comparison is quite misleading. Given that the economy has more downside risks than upside ones, it is prudent to assume the growth potential implied in these growing P/Es will not materialize.
Disclosure: I'm still in favor of large-caps. There are still quite a few value plays.
From WSJ:
Investment professionals define midcap stocks in varying ways. But the definition used by Standard & Poor's -- stocks with market capitalization, or total stock-market value, of $1 billion to $5 billion -- is one measure that is fairly widely used.
So far this year, the firm's S&P MidCap 400 index is up 10.2%, surpassing the 7.1% climb of the S&P SmallCap 600 and the 5.3% rise of the large-cap S&P 500-stock index.
...
Midcaps have been getting more expensive than large caps by some measures. The S&P MidCap 400 is trading at about 18.2 times expected 2007 earnings, while the corresponding price-earnings ratio, or P/E, for the S&P 500 is 15.9, and that of the small-cap index is 19. However, Standard & Poor's Mr. Young says that when earnings growth rates are taken into consideration, midcaps look far more attractive than both large and small caps.
He looks at so-called PEG ratios, or price to earnings to growth ratios, that can be derived by dividing the P/E by the earnings growth rate. The midcap index's PEG ratio of 1.4 is cheaper than the 2.4 figure for the S&P 500 and the 1.9 number for the S&P 600.
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