Forget the Needle in the Haystack -- U.S. Mega Caps are Hiding in Plain Sight

by Carla Fried August 22, 2012

The flight to quality isn’t confined to U.S. Treasuries. It turns out big U.S. blue chips are also getting some safe(r) haven love amid global economic and market turmoil. Big multinational U.S. firms have been outperforming of late, and even better, many mega caps are trading at below-market valuations. Big is better these days, and you don’t necessarily have to pay up to get it.

First, the performance edge: The Guggenheim (formerly Rydex) Russell Top 50 etf (XLG) that tracks the index of the 50 largest U.S. megacaps has outperformed the SPDR S&P 500 etf (SPY) year-to-date.

XLG data by YCharts

Toss in a ETF that holds large, mid and small cap U.S. stocks-Vanguard Total Stock Market (VTI)-and the outperformance for the mega caps is even larger:

XLG data by YCharts

One more comparison: the year-to-date performance of mega caps is more than double the return of global small caps (Vanguard FTSE All World Small Cap (VSS))

XLG data by YCharts

Now on to valuation. The top two holdings in the Guggenheim Russell Top 50 ETF are Apple (AAPL), Exxon Mobil (XOM). Neither is exactly trading at nose-bleed levels.

AAPL PE Ratio data by YCharts

Using the YChart Stock Screener, it turns out a who’s who of big boys earn the “Attractive” rating and sell at below-market price/earnings levels. Energy firms dominate the list: Exxon Mobil, Conoco-Phillips (COP), Royal Dutch Shell (RDS.B), and Chevron (CVX) deliver big Treasury-beating yields with p/e levels below 10.

XOM Dividend Yield data by YCharts

Caterpillar (CAT) also makes the sub-10 p/e. And so far, this big boy isn’t showing signs that orders are slowing significantly amid global growth concerns.