By Amey Stone In the stock market, whatever happened to big is beautiful? A massive market capitalization was once a hallmark of a safe, steady grower -- the kind of company with dominant market share, strong brands, and the best in management.
But in the last 5 years, prices of the 10 biggest stocks have fallen an average of 9%, according to research performed by Zacks Investment Research for BusinessWeek Online.
FAT AND SLOW? For much of that time, the largest caps actually held up better than the broad market, because they didn't land with quite the same thud as smaller names during the 2001-2003 recession (the S&P 500 index has fallen in price by 18% over the past five years).
But in the last year, large-cap names have severely lagged behind a recovery in the broad market. Stocks in the S&P rose 13% in the past year, while the largest 10 gained just 3%, according to Zacks. "With companies that big, you start to run into the law of large numbers," says Shawn Price, portfolio manager of the Touchstone Large-Cap Growth Fund.
Companies like Microsoft (MSFT) and Wal-Mart (WMT) are so big and boast so many customers that getting meaningful growth off of such a large base is a struggle, he points out.
HEAVY BUT LIVELY. That doesn't mean mega-caps aren't worth owning. A handful should be core holdings in every long-term portfolio, say investment managers. And investors inevitably return to the safety of the biggest stocks when they get skittish, notes Jeanne Mockard, portfolio manager of the George Putnam Fund of Boston.
The trick is to buy the elephants that can still dance -- those large-cap stocks likely to increase earnings faster than anticipated, says Nick Raich, director of research at Zacks. If they have a healthy dividend, all the better, says Mockard.
Following are the top 10 of the largest market cap stocks -- all with market capitalization of more than $150 billion -- ranked by the Zacks proprietary earnings momentum score (where 1 is the strongest and 100 the weakest).
Exxon Mobil (XOM)
Thanks to surging oil prices, integrated oil giant Exxon Mobil earns a score of 28 for earnings momentum -- not a strong buy according to the Zacks system, but the strongest ranking of the true mega-caps, says Raich. Exxon Mobil also boasts the best share-price appreciation in the past year, with a 33% hike, to $58. It even has a decent yield, at 1.96%. Just watch out: If energy prices fall, so will the shares.
General Electric (GE)
After some rough years, General Electric has got its earnings groove back, now rating a Zacks earnings momentum ranking of 33. Investors haven't quite caught up with the story, however, and in the past year the stock has gained just 5.41%, at $34. Even if it takes a while for this giant to move -- and Mockard warns it isn't that cheap -- its 2.6% dividend pays you to wait.
As the king of computer chips, Intel serves as the bellwether of the technology sector, which is finally bouncing back after being flattened by the burst bubble. Zacks rates Intel 33 for positive earnings momentum, and its stock is up 21% in the past year, to $26. Its yield is 1.23%.
Johnson & Johnson (JNJ)
JNJ has weathered the trials of big pharmaceutical companies better than most, and shares have climbed 12% in the past year, to $63. Now Zacks rates it a 34 for earnings revisions. It has a handy 2.09% dividend yield. "It's one of the highest quality companies you can find," says Mockard.
As the world's largest retailer, Wal-Mart faces big problems if consumer spending weakens, which it may well do in the face of higher gasoline prices. It disappointed investors with its latest sales forecast and has fallen 14% in the past year, to $31. At just 1.26%, its yield is hardly compensation. Going forward, Zacks rates it a tepid 41.
Pfizer took a big hit this year when medical risks from its arthritis drug Celebrex surfaced. But the pharma kept the medication on the market, and Mockard says its pipeline for new drugs looks good. Zacks gives it an earnings momentum score of 41, and the stock is down 17% in the past year, to $26. But its 2.92% yield is decent, and Mockard believes it could be a good buy at current levels.
Bank of America (BAC)
Bank of America has had a tough summer, plunging on worries about integrating its latest acquisitions as well as the impact of a higher short-term interest rate on profits. For the year, the stock is flat, but Zacks gives it a middling 44 grade in terms of earnings momentum. Mockard is optimistic at current prices. She calls it a "good long-term value" at the current price of $45. You can't beat the yield of 4.12%.
The scandal-ridden insurance stock has rebounded off of its April lows and, at $61.50, is down just 10% for the year. But Mockard believes it is still too early to get back into AIG. "In the past, in these kinds of situations, it has not paid to jump in too fast," she says. Zacks rates earnings momentum at 46. Its yield is just 0.81%.
The software giant's earnings power gets an uninspiring rating of 70 by Zacks. The stock has stalled in the red for the past year, with a decline of 1.15%. But at least it added a dividend last year yielding 1.2%. Microsoft trades at $27, a nice rebound from April lows of $24.
The financial services king gets only a 77 from Zacks for its earnings power -- the firm's worst rating ever. Not only is Citi's new management still proving itself, but higher interest rates and waning consumer spending could hammer its business model. For the past year, the stock is down 2%, to $44, but at least it boasts a handsome dividend yield of 3.99%.
Put all these mega-cap stocks together, and you'd have a diversified portfolio that might just outperform in the coming year -- particularly if investors grow more risk-averse. But rather than buying all 10, pick and choose among them, Raich advises. It may be hard to find these elephants dancing, but some still look pretty light on their feet. Stone is a senior writer for BusinessWeek Online in New York