Today, we feel this opportunity is greater than ever because of the extreme disparity in relative valuation levels between large and medium and small companies, and the historical ability of mid cap stocks to generate superior returns. The success of the largest capitalization stocks is contingent on the success of the broad economy and the smaller and medium sized companies that dominate its composition. Large companies sell their goods and services into the broad economy, and as the chart below shows, it is in the broad economy where the U.S. consumer is employed and where the majority of new job growth occurs. We believe it will be difficult for large cap companies to meet their growth expectations without mid and small cap companies exceeding theirs. Regardless of the valuation methodology, mid cap stocks offer a compelling story.
Size is a double-edged sword.
It can create economies of scale, but it also can create inertia. Large companies eventually reach a ponderous size where they have difficulty getting out of their own way. For one thing, as companies grow their market share, they become a larger and larger percentage of the market they serve, and their growth becomes limited by the growth potential of the market itself. In other words, to grow they have to grow the entire market. Forty percent of these companies have changed in the last 5 years, as previous market leaders falter and are replaced by new up and comers.