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Stock Strategist

This Year's Value Creators and Destroyers

A look at who created and destroyed the most value in the past six months, by market cap.

Mentioned: , , , , , , , , ,

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 >>

Jaime Peters does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.