This Year's Value Creators and Destroyers

The first half of 2007 was a roller coaster. After dropping 3.5% on February 27, the largest loss in one day since the 9/11 tragedy, the S&P 500 Index roared back to life and now sits 7.3% above where we started the year. As we've done in the past, we've examined the dollar changes in stock market values to derive our value creators and destroyers for the year. To figure the market cap for both Dec. 31, 2006, and June 21, 2007, we took the number of shares outstanding at the end of 2006, adjusted for any splits, and multiplied it by the market price at both dates.

There are always problems with these types of screens, and knowing the potential weaknesses is important in interpreting the results. Using our methodology, we have eliminated market capitalization gains solely from share issuance, including stock option exercises and acquisitions, leaving only what shareholders as of Dec. 31, 2006, would have experienced if they held onto the stock. If an acquisition was dilutive to the existing shareholders, it is reflected in the numbers. However, this approach can overstate the market cap slightly when companies buy back shares. If share buybacks exceeded 10% of shares outstanding, we eliminated the company from our screen so as not to skew our numbers too greatly. In addition, our numbers have a survivorship bias, so any companies that were de-listed due to bankruptcy or other financial problems are not reflected in our numbers. Finally, as a result of looking at total market capitalization, the results are biased toward large-cap stocks.

The Results

Gains and Losses by Market Capitalization
	Market Cap on 12-31-06 ($ million)	Market Cap on 06-21-07 ($ million)	Change ($ million)	Percent Change
Mega (>$100 billion)	4,988,954	5,214,199	225,245	5%
Large ($10-$100 billion)	7,602,257	8,231,373	629,116	8%
Mid ($1-$10 billion)	3,621,128	3,999,289	378,161	10%
Small ($100 million-$1 billion)	755,810	755,429	-381	0%
Micro (<$100 million)	42,922	38,311	-4,611	-11%

Stock performance varied widely during the first six months of 2007. The obvious winner was the 10% change in mid-cap stocks. The loser, just like last year, was the micro-cap stocks, dropping 11% of their value after losing 22% last year.

Taking a closer look at the components tells a slightly different story: the larger the stock, the more likely the positive return. 76% of the mega-cap stocks created value during the first six months, while 69% of the mid-cap stocks created value. Only 50% of the small cap stocks created value, while less than half (42%) of the micro-cap stocks had larger market caps after six months. Despite following up the excellent performance in 2006 with a strong first half so far in 2007, we continue to see bargains among the giants and believe a company-by-company review will yield some excellent opportunities.

Sectors by Market Capitalization
	Market Cap on 12-31-06 ($ million)	Market Cap on 06-21-07 ($ million)	Change ($ million)	Percent Change
Energy	1,547,808	1,857,982	310,173	20%
Industrial Materials	1,930,443	2,225,797	295,354	15%
Hardware	1,424,577	1,599,835	175,258	12%
Business Services	979,243	1,092,579	113,335	12%
Health Care	1,940,433	2,036,578	96,145	5%
Consumer Services	1,466,209	1,532,261	66,052	5%
Telecom	457,164	514,834	57,670	13%
Software	701,784	738,112	36,328	5%
Consumer Goods	1,448,614	1,474,939	26,325	2%
Media	644,671	668,713	24,042	4%
Utilities	585,747	608,590	22,843	4%
Financial Services	3,884,377	3,888,381	4,004	0%

Performance across the sectors varied widely during the first six months of 2007. Compared with the S&P 500's increase of 7.3%, energy, industrial materials, hardware, business services, and telecom had an excellent first half. Consumer goods and financial services brought up the rear, growing only 2% and 0%, respectively. Energy led the way, increasing 20% and adding $310 billion of market capitalization to its ranks in the first six months. A whopping 83% of energy stocks saw their stock prices go up during the period. Large-cap players like  ExxonMobil (XOM),  Schlumberger (SLB) and  Chevron (CVX) led the charge. However, after such a run, finding bargains is much harder; only four of our 155 energy stocks are rated 5 stars.

Financial services ranked dead last among value creators this quarter, increasing its market cap by less than 1% or only $4 billion. The industry was plagued with problems, with the subprime mortgage blowup causing firms like  Novastar (NFI) to decline 65%, and an inverted yield curve and the looming question of overall credit quality hurting the banks.  Citigroup (C) and  Bank of America (BAC) combined to lose $26 billion of market capitalization during the quarter. On the flip side, when problems happen, Mr. Market gets emotional and often creates opportunities for investors; there are currently 24 financial stocks rated 5 stars, including Bank of America.

Click here to see which stocks created and destroyed value >>