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Which Companies Will Lead a Mega-Cap Comeback?

Shares of Kraft , Boeing , Procter & Gamble and other so-called mega-caps are making a comeback against smaller companies, which have led the bull market up until this point.

Analysts pointed to a diversification away from risk, as well as the interest in stable dividend payments, as reasons for this rotation by money managers as the bull market nears its 13th month.

“The larger cap stocks or the ‘generals’ are catching up to the small and mid cap stocks or the ‘troops’”, wrote, Mary Ann Bartels, technical research analyst for Bank of America Lynch, in a note to clients this week. The chart analyst noted that the smaller-focused Russell 2000 and S&P 500 Mid Cap indexes hit new bull highs in early March, but last week the S&P 500 and the Dow Jones Industrial Average did the same.

Commerce Department figures today showing a third straight monthly increase in orders for durable goods, larger items like aircraft, validated the comeback in companies such as Boeing and Ford. Boeing is up 34 percent this year to lead the Dow, while Ford is up 40 percent.

Large stocks outperformed smaller companies today after Starbucks initiated a 10-cent dividend and ConocoPhillips boosted its payout.

“I’m playing dividend stocks for clients,” said Patty Edwards, founder of money management firm Storehouse Partners in Bellevue, Washington. “If we start going down in the market, the big capitalization names with their dividend yields will help hedge it.”

The iShares Russell 2000 ETF is up 66 percent the last 12 months, compared to a 45 percent gain by the SPDR S&P 500 ETF over the same time period. That gap may start to narrow as 2010 goes on, investors and analysts said.

“This is proof of the massive lack of clarity and direction of money managers,” said Steve Grasso of Stuart Frankel. “After goosing small caps to the point of outperforming large caps, and knowing there are no absolutes in markets, they are all reversing course at the same time.”

Grasso said to watch for bigger banks in particular to catch up to the performance of regional banks.

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