My Investment Pick for a Slowing U.S. Economy

The DOW is down around 8% in the last two weeks mostly due to concerns over an economic slowdown. Major economic indicators are pointing towards a slowdown in U.S. growth, which has given rise to fears of another recession. I believe large cap stocks are set to outperform in the coming years. Specifically, I recommend Vanguard's Mega Cap 300 Growth ETF (MGK). In general, I am a value investor, but I like MGK because of the reasons outlined below.

First, I like large caps over small caps because they have the ability to generate revenue overseas, which could cushion a downturn in the U.S. economy.  The top 10 holdings of MGK are in order: Apple, IBM, Coca Cola, Oracle, Microsoft, Google, Phillip Morris, Schlumberger, Pepsi, and Wal-Mart. All of these companies have strong balance sheets and many generate a significant portion of their revenue overseas. Historically, large caps have performed better than small caps during periods of slower growth. Small caps have also performed very well since the recession and they look expensive relative to large caps. For example, Vanguard's Small Cap Growth ETF sells for 31 times earnings, while MGK sells for only 17.7 times earnings.

I like growth right now because the price of growth relative to the broad market is attractive. In comparison to Vanguard's Mega Cap 300 (MGC), MGK offers strong growth potential without a large premium. MGK is currently selling for 17.7 times earnings with a growth rate of 12.7% and return on equity of 25%. In comparison, MGC sells for 15.4 times earnings with a growth rate and return on equity of only 6% and 21.1% respectively. If the U.S. economy slumps, companies that can grow revenue and earnings will receive a large premium.

I am not attempting to predict the direction of the U.S. economy, but MGK provides downside protection in the event of continued slow growth and positions investors to benefit from a surprise upswing.