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Buy or sell? Deciding on 20 largest stocks

John Dorfman
| Monday, Sept. 18, 2017, 11:00 p.m.

Many investors are partial to the very largest stocks. They impart a feeling of stability and familiarity, and perhaps prestige. Institutional investors like them because they can be traded in volume without moving the price much.

So, about once a year in this column, I offer my opinions on the 20 largest stocks in the U.S. market.

Apple Inc. (AAPL, $826 billion market value), Avoid. A study by Ned Davis Research Inc. shows that owning the country's biggest stock has usually resulted in uninspired returns.

Alphabet Inc. (GOOGL, $642 billion), Buy. Alphabet's growth in revenue and earnings, always strong, has accelerated lately. And I can't think of a more innovative company.

Microsoft Corp. (MSFT, $580 billion), Avoid. I wouldn't pay 30 times earnings and eight times book value (corporate net worth) for a company whose growth has fallen from great to only good.

Facebook Inc. (FB, $498 billion), Avoid. Facebook is a leader in Internet advertising and is debt free. But at 15 times revenue, I think it's overpriced.

Amazon Inc. (AMZN, $474 billion), Avoid. Analysts expect Amazon's earnings to double in 2018. I think that's optimistic. And a stock price of 250 times earnings seems ridiculous.

Berkshire Hathaway Inc. (BRK/A, $444 billion), Buy. Warren Buffett, probably the world's greatest investor, runs this conglomerate. The stock sells for only 1.5 times book value.

Johnson & Johnson (JNJ, $361 billion), Buy. Fewer than half of the analysts who cover J&J recommend it. But I still like it. An aging population favors this diversified health care company.

Exxon Mobil Corp. (XOM, $339 billion), Buy. The energy business is still struggling, but this is a class outfit, and the 3.8 percent dividend yield is attractive.

JP Morgan Chase & Co. (JPM, $322 billion), Buy. I expect interest rates to rise, helping banks to earn a bigger spread on their loans. I also have high respect for CEO Jamie Dimon.

Bank of America Corp. (BAC, $257 billion), Buy. The rationale is the same as with JP Morgan, except that I don't like the Bank of America management as much.

Wells Fargo & Co. (WFC, $256 billion), Avoid. Wells Fargo employees opened more than 1 million accounts for people without their knowledge. Repercussions may rumble on.

Visa Inc. (V, $241 billion), Neutral. My colleague Tom Macpherson has high regard for this stock, so my firm owns it for a couple of clients. However, it seems expensive.

Wal-Mart Stores Inc. (WMT, $240 billion), Avoid. Revenue growth has been sluggish the past five years, and earnings growth has been nonexistent.

Procter & Gamble Co. (PG, $238 billion), Avoid. The big consumer brands company hasn't grown its book value (net worth) significantly in the past decade.

AT&T Inc. (T, $228 billion), Buy. Steady and substantial dividends are the appeal here. Capital appreciation potential seems slight, but it may be a good defensive holding.

Chevron Corp. (CVX, $217 billion), Buy. Earnings are starting to bounce back at this big oil and gas company, and the stock sells for only 1.5 times book value.

Pfizer Inc. (PFE, $210 billion), Neutral. There are many things I like about this large pharmaceutical company, but the dividend may need to be cut, and I don't see any favorable signals from insider buying.

General Electric Co. (GE, $207 billion), Neutral. I like it that GE is re-emphasizing its industrial roots, but strong profitability so far remains elusive.

Oracle Corp. (ORCL, $202 billion), Avoid. This is a tough call, but Oracle's revenue growth has slowed, and its profit margins have shrunk. For that, I don't want to pay 20 times earnings.

Coca-Cola Co. (KO), $197 billion), Avoid. This year is likely to be Coke's fifth consecutive year of declining revenue. It is still priced as a growth stock but may not be one.

This is the 14th column I've written, starting in 2001, with ratings on the largest U.S. stocks. The average one-year return on my “buy” rated stocks has been 12.3 percent. On the neutrals, it's been 11.0 percent. And on my “avoids” the average return has been 10.0 percent.

Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.

Disclosure: I own Alphabet, JP Morgan and Bank of America personally and for most of my clients. A few clients own Berkshire Hathaway, Johnson & Johnson, Exxon Mobil, Visa, AT&T and Chevron.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

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