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| Course 302:
Market Capitalization |
| Market Cap among Sectors |
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The relationship between market cap and the size of the business varies widely not just among specific stocks but among broader sectors as well. For example, utilities are seen as stable companies without much room to grow. As a group, their market caps average about 1.7 times book value and 1.3 times sales; a utility such as Ipalco IPL, with valuations more than twice that, is a relative highflier within the sector.
In contrast, the optimism about many technology stocks is greater. As of late 1999, the average technology stock was priced at about 15 times book value and nine times sales, and a tech company with valuations like Ipalco's would be a relative bargain. Within the tech sector, Internet stocks are much pricier than their average tech peer; their market caps are often more than 50 times book value and 20 times sales.
Just about everybody, including Morningstar, defines the size of a company primarily in terms of its market cap. So it is important to realize that market cap measures the size of people's expectations about a company's future, not the present size of the company's actual business. Some large-cap stocks are established businesses with lots of sales and profits; others are hot newcomers with investor expectations higher than actual revenues. It's always a good idea to look beyond market cap to see whether it is based on the company's prospects or its current condition. Next:
The Quiz
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