It’s time to buy big stocks while they’re cheap
Big stocks carry a lot of weight on the market, says this U.S. advisory, and this is the time to buy three large cap stocks at discount prices.
“The bigger they are, the harder they fall.”
That’s just as true of tall companies as it is of tall timber.
As one U.S. advisory remarks, who didn’t hear the crash when Enron went down?
It’s also true of stocks that managed to survive, says Dow Theory Forecasts. Firms like Bank of America, Citigroup and General Motors didn’t just make big headlines, they also cost investors a lot of money.
But size matters in another way as well, the advisory adds. As we learn on the playground, “the bigger they are, the harder they hit.”
In other words, the largest stocks exert “an outsized force on capitalization-weighted indexes.”
That’s even truer on the smaller Toronto exchange than it is in New York. Nortel Networks (speaking of falling hard) once took up a third of the value of the exchange.
That can work in your favour today, the advisory says. As the stock market moves ahead, big stocks trading at big discounts will become even more valuable in 2011.
It has three big names to recommend.
Serious investment appeal
The 50 largest stocks on the S&P 500 Index combine for a market capitalization of about $6 trillion. That’s 44 per cent of the value of the entire index.
“And right now, those big stocks are flashing some serious investment appeal.”
The biggest stocks on the index score well in this advisory’s patented stock-picking system, known as Quadrix. They do well in Momentum, Quality, Financial Strength and Earnings Estimates.
And they do particularly well in Value, or in valuation. Their collective trailing price/earnings (PE) ratio is 14 per cent behind the overall index.
“That combination of value and broad-based fundamental strength can add up to good news for investors. Rarely have so many of the biggest, best-known companies been available at such discounts.”
It is not unusual for smaller, riskier stocks to lead the way in the early stages of a bull market, the advisory adds. That has been the case in the stock market rally we have been going through.
“But over time, quality wins out,” it insists. ”In 2011, the market should recognize the strength of some of the most massive players.”
Double-digit discounts
The first of the advisory’s three recommendations is Abbott Laboratories (NYSE-ABT). Its market capitalization of $74 billion puts it fourth among U.S. drug companies.
But it also sells nutritional, diagnostic and vascular products. They account for nearly half of its revenue, which helps blunt the problem so many drug firms run into when patents run out.
Abbott made $10 billion in acquisitions last year, bulking up its position in generic drugs and emerging markets. Its size also helps it absorb adversity. 360 million glucose testing strips were recalled last year, but the company’s profits scarcely felt the effects at all.
This stock trades at double-digit discounts to its three-year averages for earnings, sales and cash flow. It’s cheaper than other pharmaceutical firms based on estimated earnings for 2011. Yet per-share profits should be up 12 per cent this year and next.
Abbott trades at $47.90 and yields 3.6 per cent on its dividend of $1.76. It’s a Buy and a Long-Term Buy (best buy for the next 24 months).
The edge in sales
Microsoft (NASDQ-MSFT) is no longer the biggest tech stock when it comes to market cap. That distinction now belongs to Apple. But it still has the edge in sales, which came in to the tune of $65 billion last year.
Sales of smart phones could exceed those of personal computers in the next few years, points out the advisory. Microsoft will “provide a glimpse” of its new operating system for mobile devices in January.
Meanwhile, its Windows Phone 7 launch is off to a good start, with 1.5 million phones using the new system sold in six weeks. At least one new tablet computer launched by Acer in 2011 will use Microsoft’s system.
This stock earns high scores in both Momentum and Value, says the advisory. Its free cash flow continues to mount. Trading at $28.14 with a yield of 2.2 per cent on the $0.64 dividend, it’s a Buy and Long-Term Buy.
The litmus test
No U.S. company has had higher sales in the last four quarters than Wal-Mart Stores (NYSE-WMT). $419 billion, to be exact.
That generated free cash flow of $9 billion — higher than the total sales of 56 per cent of the companies on the S&P 500!
Still, same-store sales in the U.S. aren’t what they used to be, which means some of those big-box stores may be cut down in size. The company may try smaller stores in large cities like Chicago. And New York, if it can negotiate a deal with wary construction unions.
Meanwhile, the fastest growth is overseas. Wal-Mart plans to increase its work force by 36 per cent, almost all of that outside the U.S. Foreign success is the litmus test for America’s big companies today.
This stock is cheap at just 12 times next year’s earnings estimates. It trades at $54.13, yielding 2.2 per cent on the $1.21 dividend. Wal-Mart is a Long-Term Buy.
On the stock market, “the bigger they are” isn’t usually followed by “the faster they rise.” But with so many large caps going cheap, this advisory suggests, big stocks may turn into hot stocks.
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