Chris Burvill on the case for Mega Caps

During the internet bubble, it was old economy stocks and utilities that got overlooked. In the current M& A frenzy, mega caps have assumed the equity market's ‘most unloved’ mantle, says Chris Burvill, manager of the Gartmore Cautious Managed Fund.

“We believe that so-called mega caps offer some of the most compelling value in the UK stock market,” says Chris. “Many observers claim that the equities are still attractively valued in PE terms, despite the recent rises, but the truth is that only mega caps are actually cheap relative to history. Moreover, stronger balance sheets, sustainable higher margins and dividend yields are a powerful trilogy in combination with valuation support. There is a lot of complacency among equity investors and, while there have been operational issues, the crux of the argument against the likes of GlaxoSmithkline, Vodafone, HSBC and BP seems to focus on the assertion that they are too big to be taken over.“

Chris highlights pharmaceuticals giant GlaxoSmithKline as a case in point. “In the rush to find the next mid-cap bid target, Glaxo has been left behind. The stock was derated on unfounded concerns about its drugs pipeline and sales of core existing drugs. Yet Glaxo continues to offer solid earnings growth with a good degree of visibility plus an attractive dividend yield. Five major new product launches are planned for this year including Tykerb, a late-stage breast cancer drug, and Cervarix, a drug for cervical cancer, with a further 30 significant product opportunities in Phase 3. The shares have outperformed since the preliminary numbers but we believe there is more to come.”