Reuters Money

In this stock market, size matters. And not in a good way.

As the Dow flirts with two-year highs – Middle East chaos and nuclear meltdowns be damned – it’s the smaller and riskier companies that have benefited most dramatically. The big, safe, dividend-paying megacaps? They’re still shivering on line, desperate to be let into the party.

“The rally of the past two years has left many blue chips in the dust,” says James Early, senior analyst for popular investing site The Motley Fool. “They’re suffering from what I call Middle Child Syndrome: The speculators only want growth, the doomsayers only want yield, and the blue chips just get left behind.”

A sampler of famous companies collecting dust in the bargain bin, according to Early: Kellogg, Clorox and Coca-Cola. With such big names boasting reasonable P/Es, healthy balance sheets and fat dividends, value-minded investors have an inviting opportunity to strike.

“These are billion-dollar brands with great pricing power, and they’ve largely been missing out on the rally,” says Early, noting that blue chips are useful inflation hedges as well. “Value is hiding in plain sight.”

For blue-chip lovers like L.A.’s Jeff Lipsman, a former software company owner, it’s like waking up to Christmas every day. Ever since the market bottom in March 2009, he’s been stocking up on giant names like Chevron, Consolidated Edison, Kimberly-Clark, and Altria. His biggest home run? Caterpillar, which tripled before he finally rung the register.

Despite the long market run up, Lipsman still has his antennae up for blue-chip bargains. “Blue chips are great inflation hedges, they pay good dividends, and then you can reinvest those dividends as well,” says Lipsman. “They have multi-pronged benefits and are great for retirement saving in so many ways.”

And yet, they’ve long been out of favor. It’s enough to have legends like Jeremy Grantham, co-founder of Boston-based investment managers GMO, reaching for the Xanax. In his most recent quarterly investor letter, Grantham singles out the past couple of years as “as bad a pasting for high quality as it has ever had … our sustained heavy overweight in quality stocks was painful.”

Indeed, take a look at telling data from Standard & Poor’s. This year’s estimated average P/E ratio for the S&P 500 currently stands at a lean 13.7. But mid-caps are averaging 18.4 times earnings, and small caps are selling for an ever-richer P/E of 19.5. Past spreads were even more egregious, with small caps going for almost 60 times earnings in 2009.

It’s a curious trend, since in a world rife with risks, investors usually gravitate to safer harbors. But neither rising commodity costs, nor Eurozone bailouts, nor the messy Libyan conflict, nor Chinese inflation — nor anything else – seem to have deterred investor appetite for high-beta assets.

Blue-chip lovers can take heart, though. Even though many megacaps have seriously underperformed, that lag could also signal a unique buying opportunity. After all, market trendlines never continue in perpetuity. “Extreme value discrepancy is in our favor,” writes GMO’s Grantham.

The return of retail investors could provide the necessary spark for the blue chips, says The Motley Fool’s Early. Following the financial meltdown of 2008 to 2009, many spooked individuals exited the stock market altogether, hiding out in bonds and money markets. But they’re now inching back into equities: Long-term mutual funds recently notched their 13th consecutive week of inflows, according to the Investment Company Institute, with more than $78 billion shifting back into the market.

Mom-and-pop investors — encouraged by continuing market gains, and fed up with the rock-bottom yields in their savings accounts — could be drawn to some of the market’s most familiar names. “The valuation of blue chips hasn’t kept pace with the market, and over the next year we could see a reversion to the mean,” says Early. “I wouldn’t be surprised to see a coming renaissance for the blue chips.”

For Jeff Lipsman, he’s content to keep scooping up blue chips while speculators look elsewhere. He’s not even rattled by the prospect of another market crash. “I’m buying and holding,” says Lipsman, 54. “And since they’re paying me dividends, there’s not even a reason to sell them if the market goes down.”