Don Dion, Fidelity Independent Adviser newsletter - Large-cap stocks are no longer in the doghouse

Don Dion, editor of the Fidelity Independent Adviser newsletter, says the tide is turning for large-caps, and he explains that it might be best to look for large companies that are sitting on big cash reserves, as several are. Read about one such example in the financial services arena. Afterward, find out which fund this featured expert profiles as part of his Portfolio Spotlight. Commentary from September 14 In the past five years, small- and mid-cap stock indices have trounced their large-cap counterparts. But Don Dion and his team have been saying all year that this trend is about to end. And now it's clear that the tide is turning. With the Dow Jones Industrial Average outpacing the other major indices on the year, and up nearly 8 percent, it's becoming clear that large-cap stocks are no longer in the doghouse. In fact, they are becoming the place to put money. And if you are looking at large-cap stocks, it might be best to look for ones that are sitting on big cash reserves, as several are. In a July report, Citigroup's (C) chief equities strategist argued that cash-rich big-caps were a best bet. Cash and equivalents relative to market value are near 20-year highs, he noted, meaning plenty of potential for shareholder positives such as buybacks and increased dividends. Let's look at one example. American Express (AXP) is a financial services giant. The company benefits from a great brand image and strong customer loyalty, giving it a critical edge over its competitors. The average consumer in the United States, for example, charges four times as much to their American Express cards as they do to their Visas and MasterCards. American Express has recently tightened operations, slashing costs and focusing on the company's core businesses. In 2005, it spun off its insurance and investment services arm, Ameriprise Financial (AMP). These moves left it with cash and equivalents over 10 percent of market value, meaning American Express has a lot of money on its books. Earlier this year, the company raised its quarterly dividend 25 percent, to $0.15 a share, and approved a buyback program that could see as much as 16 percent of outstanding shares purchased. There are a number of large-cap stocks that are still offering that kind of value, as well as lower risk than small- and mid-cap stocks. Investors who were burned by large-caps five and six years ago appear to be over the disappointment. So for a while, bigger may end up being better for investors. Fidelity Fund, which currently comprises 31 percent of Dion's Fidelity Growth Portfolio is a large-cap growth fund that currently holds American Express among its 144 holdings. As of yesterday, the fund was up 5.83 percent year to date. Portfolio Spotlight ICON Telecommunications & Utilities (ICTUX) The ICON managers apply their proprietary investment approach to various sectors, including telecommunications and utilities. The strategy has worked particularly well here: ICON Telecommunications and Utilities' year-to-date and one-, three- and five-year returns all handily outpaced the S&P 500 and the average communications fund, according to Morningstar—and ICTUX's five-year gain landed in the category's top 12 percent. ICTUX recently held 31 percent of its assets in utilities stocks, with most of the rest in telecommunications. (A smaller percentage was held in stocks that fell into the computer hardware, industrial materials, energy and business services categories.) The ICON process has helped this fund weather an up-and-down—or, more accurately, down-and-up—environment for telecommunications stocks during the past several years. ICTUX demolished its competition during the bear market, in part because its value criteria kept it from loading up on pricey networking stocks—a strategy many of its competitors pursued during the tech bubble. Another reason: The fund holds a sizable weighting in foreign shares, which recently accounted for just over half of assets. Foreign stocks dramatically outperformed U.S. shares during the early years of this decade, helping this fund beat the average communications offering by 41.8 percentage points in 2000, 11.1 points in 2001 and 21.3 points during 2002. That development highlights the benefits of international diversification. This article highlights the commentary of Don Dion for the Zacks.com audience. Don Dion provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Fidelity Independent Adviser" newsletter. Try it free for 30 days and see if you can improve your investment performance. 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