The Market Put a Premium on Large Caps with Strong Margin Growth



Large-cap energy stocks with above-average margin growth mostly outperformed peers

The median EBITDA (earnings before interest, taxes, depreciation, and amortization) growth rate over the last 12 months within the Energy Select Sector SPDR ETF (XLE) currently stands at 11.79%. Those above this mark have had an average return over the last 12 months of -16.54% compared with an average loss of -29% for those below.

In terms of last week’s performance, Cameron International (CAM) was a stock in the above median EBITDA growth category that posted the highest returns while Williams Companies (WMB), in the same category, posted the lowest returns. Stocks with EBITDA growth below the median largely posted weekly losses, with ONEOK (OKE) posting the highest loss. Schlumberger (SLB), which generated a 0.30% weekly return, was an exception.

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Once the same market cap filter of $20 billion used in part seven of this series is placed on XLE’s holdings, the average loss of companies above the median EBITDA growth rate that are also above a $20 billion market cap falls to less than -10.5%. Smaller capped components had large overall losses that were exacerbated where profitability margins were falling. Larger capped companies are more able to withstand lower prices and the market has been rewarding them for their size.

Price-to-earnings ratios

However, from a forward PE (price-to-earnings) point of view, average valuations are comparable with the ~39.5x average forward PE for holdings in XLE above $20 billion versus ~40.5x for those below the marker. This spread may widen going into the second half of 2015, especially in a scenario where crude oil finds new lows.

This trend transcends the energy sector in the sense that large-cap stocks slightly outperformed mid-cap stocks while mature stocks slightly outperformed growth stocks in terms of returns over the past week. Large caps on the XLE offered an average five-day return of 0.20%, while mid-cap stocks offered a return of -0.10% last week. While stocks with above-average margin growth offered an average return of 0.41%, stocks with below-average margin growth offered returns of -0.37% last week.


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