20 largest stocks: good, bad, just OK
By John Dorfman
Published: Tuesday, Sept. 25, 2012, 12:01 a.m.
Some investors prefer large stocks because they lend stability and solidity to a portfolio. So about once a year, I rate the largest 20 stocks in the United States.
Today's ranking is the ninth one I've attempted, the previous ones being in 2001-2006, 2009 and 2011. On average, the big-cap stocks I've recommended have shown one-year total returns (including dividends) of 13.4 percent. Those on which I was neutral have returned 10.8 percent. And those I said to avoid have returned 9.5 percent.
Here are my latest rankings, with the largest stocks first.
• Apple Inc. (AAPL, $656 billion). Avoid. People are lining up for the iPhone 5, the latest in a string of big hits for Apple. But most stocks have faltered once they became the biggest in the nation. While CEO Tim Cook is capable, his late predecessor Steve Jobs was a genius.
• Exxon Mobil Corp. (XOM, $434 billion). Buy. The largest oil company has the muscle to grab the best drilling locations and hire the top engineers. I love Exxon's balance sheet, with long-term debt of less than $9 billion and cash or near-cash of nearly $18 billion.
• Microsoft Corp. (MSFT, $261 billon). Buy. In light of Apple's rapid ascent, investors view Microsoft as dowdy. Yet Microsoft had a return on stockholders' equity last year of 27 percent. I'll take that any day of the week, especially if I only have to pay 11 times earnings.
• Wal-Mart Stores Inc. (WMT, $250 billion). Avoid. The balance sheet is just so-so, with debt about 75 percent of stockholders' equity. The giant discounter withstood the recession beautifully, but when better times come, I think it will lose market share.
• Google Inc. (GOOG, $241 billion). Neutral. The stock is too expensive for me, but growth is impressive, with earnings growing at a 22 percent annual pace the past five years.
• General Electric Co. (GE, $239 million). Avoid. None of GE's four main segments (GE Capital, aerospace, energy infrastructure and health care) has been growing fast lately. Two of them — GE Capital and aerospace — are struggling to achieve any growth at all.
• International Business Machines Corp. (IBM, $235 billion). Neutral. Earnings growth is quite healthy, but the stock seems close to fairly priced at 14 times earnings.
• Chevron Corp. (CVX, $231 billion). Buy. Chevron is quite profitable, with a return on stockholders' equity last year of about 24 percent. Debt is only 8 percent of equity, and the stock is cheap at a mere 9 times earnings.
• Berkshire Hathaway Inc. (BRK/B, $222 billion). Buy. It's late innings for CEO Warren Buffett, 82, but he remains probably the greatest investment mind of our time. The stock sells for only 1.3 times book value (corporate net worth per share).
• AT&T Inc. (T, $220 billion). Buy. I expect smartphones and texting to get even more popular, and I like the 4.6 percent dividend yield.
• Procter & Gamble Co. (PG, $191 million). Avoid. There is not enough growth, in my opinion, to justify the current multiple of 19 times earnings.
• Johnson & Johnson (JNJ, $190 billion). Buy. The health-care conglomerate had a pre-tax profit margin of 19 percent last year and offers a 3.5 percent dividend yield.
• Wells Fargo & Co. (WFC, $185 billion). Neutral. Wells Fargo stayed profitable during the Great Recession, which is more than you can say for many big banks. But growth has been tepid.
• Pfizer Inc. (PFE, $183 billion). Buy. The big pharmaceutical companies are out of favor but still quite profitable. And their dividend yields are attractive.
• Coca-Cola Co. (KO, $173 billion). Neutral. This is a top-flight company but at 19 times earnings and five times book value, you're paying up for quality. A great company is not always a great stock.
• Oracle Corp. (ORCL, $159 million). Buy. The sultan of the database world is suitable for growth investors, with a 17-percent-a-year earnings growth pace the past five years.
• Philip Morris International Inc. (PM, $155 billion). Avoid. The company carries a lot of debt, and the health concerns about smoking are a permanent problem.
• JP Morgan Chase Co. (JPM, $155 billion). Buy. The “London Whale” trading scandal will prove to be just a blip, I predict.
• Merck & Co. (MRK, $137 billion). Buy. The 3.7 percent dividend yield is attractive, and the dividend seems secure. Analysts expect a 50 percent increase in earnings this year.
• Verizon Communications Inc. (VZ, $130 billion). Avoid. Earnings have shrunk in recent years, and profitability is puny. The dividend yield looks good, but I fear the dividend might have to be cut.
Disclosure notes: Past performance doesn't guarantee future results, and my column recommendations shouldn't be confused with results for real-money portfolios I run. I own Exxon Mobil and Johnson & Johnson for most of my clients, AT&T, Berkshire Hathaway, JPMorgan, Merck, Microsoft and Pfizer for some clients.
John Dorfman is chairman of Thunderstorm Capital LLC in Boston; email@example.com or 617-542-8888.
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