Is it time to buy the big blue chip stocks?

Can the top 20 stocks outperform the small to medium cap stocks over the next 12 months?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Over the past year, small to medium capitalised stocks on the ASX have outperformed their larger brethren substantially.

The S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) is up 16%, while the S&P/ASX 20 (ASX: XTL) us up just 1.6%. The Small Ordinaries tracks the performance of the top 101 to 300 stocks in the ASX 300 index, so excludes the Top 100 stocks.

The Top 100 index is up 6.3% in the past 12 months, but most of that performance has been driven by the smaller end of the index, as the large-cap blue chips have weighed on the returns.

index-performance-12-months-to-oct-2016
Source: Google Finance

 

But that outperformance may be coming to an end with one well-known listed investment manager, Australian Foundation Investment Co.Ltd. (ASX: AFI) suggesting the big end of the market is about to turn the tables on its smaller rivals, and outperform them over the next 12 months.

Portfolio manager Ross Barker manages $6.5 billion at AFIC, and while he still sees some headwinds for many of the top 50 stocks, he's bullish on the big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Mr Barker says he expects them to be prime candidates for lifting dividends higher in the next few years, thanks to efficiency improvements, cost cutting and a recovery in commodity prices.

AFIC owns more than $300 million worth of shares in BHP, and it's the listed investment company's third-largest holding behind Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). The company also holds close to $190 million worth of Rio's shares.

All four banks have significant positions in AFIC's portfolio, but Mr Barker says while they may struggle to maintain or even increase dividends, they could still use cost-cutting to drive an increase in earnings.

Mr Barker also pointed out that infrastructure stocks Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) were both expensive at current prices – and they will both see their share prices hit when interest rates eventually go back up – something we've have warned about previously.

Motley Fool writer/analyst Mike King owns shares in Sydney Airport Holdings Ltd. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »