by Alyssa Oursler | July 31, 2012 12:15 pm
Considering the big, bold question mark that has punctuated both the American and global economies in the past couple years, is it really any surprise that mega-cap stocks have been on fire lately?
Huge American blue chips like Exxon Mobil (NYSE:XOM) and Microsoft (NASDAQ:MSFT) offer investors both stability and dividends — two appealing qualities in today’s climate of fear and uncertainty.
And they’re in demand. As reported by The New York Times, the Russell Top 50 index tracking America’s biggest stocks is up 14% — 18% if you include the group’s dividends, which average a 2% yield. In the same period, small caps (measured by the Russell 2000) have gained just 1%, and the foreign equity-tracking MSCI EAFE Index has fallen 15%.
Even the near-term popularity is apparent. The Russell Top 50 ETF (NYSE:XLG) is up more than 2% in the past month, while the iShares Russell 2000 Index (NYSE:IWM) is about a half-percent in the red.
But just like any large group of stocks, there’s almost certain to be a few individuals that don’t quite fit the bill — and the mega-cap scene is no exception. Here’s three giant stocks to avoid:
Facebook (NASDAQ:FB) has been taking heat from all angles lately, so it seems a little unfair to target it yet again — especially considering that it barely even makes the cut as a mega-cap. Facebook is the Russell Top 50’s smallest holding at 0.16%, and its market cap recently has been knocked below that $50 billion line — after going public with a worth of more than $80 billion just a few months ago!
Still, it made the list — and this dud docket.
To start with the obvious, Facebook doesn’t offer either the stability or dividend that most mega-caps boast. FB shares haven’t been able to find a floor and have lost about 40% of their value since coming public, including a huge hit after its first earnings report — which came without any guidance for the rest of the year and showed that the company’s capital expenditures are growing rapidly. So when you think of Facebook, stability isn’t exactly what comes to mind.
Throw in future concerns, such as its difficulties in monetizing the shift to mobile, or the Aug. 17 expiration of Facebook’s lock-up period, and investors don’t get that same warm-and-fuzzy feeling that tried-and-true mega-caps like General Electric (NYSE:GE) and Coca-Cola (NYSE:KO) provide.
CVS Caremark (NYSE:CVS) isn’t as obvious a dud as new-kid-on-the-block Facebook. The company is a no-doubt mega-cap worth roughly $58 billion, and its business includes more than 7,000 retail stores across the county. Still, it could be in trouble.
To start, the nation’s largest pharmacy services provider has run up near all-time highs. The success has been nice, but it’s starting to look a little overbought compared to rival Walgreen (NYSE:WAG). That’s the same Walgreen that recently announced a deal to hook back up with pharmacy benefit manager Express Scripts (NASDAQ:ESRX), closing off a spigot of customers fleeing to CVS.
And that’s only half the battle. CVS is in the same boat as Rite Aid (NYSE:RAD) and others in that the rest of its retail game is stuck competing with Wal-Mart (NYSE:WMT) and grocers like Kroger (NYSE:KR), as well as dollar stores like Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG), Family Dollar (NYSE:FDO).
Add in the fact that the share run-up also has beaten CVS’ dividend yield to a modest 1.5%, and you likely lose any further support from the income crowd.
United Technologies (NYSE:UTX) is the largest of these three stocks, with a market cap of $68 billion. It’s also the best bet of these three bad-bet stocks — if just by comparison.
UTX has a big problem: debt. Right now, United Technologies’ long-term debt sits around $21 billion, with a huge chunk of that coming as a result of its recent acquisition of Goodrich. The company already has been selling off non-core assets, such as Hamilton Sundstrand Industrial and its Pratt & Whitney Rocketdyne unit, to help pay for the deal.
But it isn’t just United Technologies’ debt that’s the problem — the company also faces uncertainty because of the government’s debt. America’s spending will be a hot topic as we approach the presidential election and the looming “fiscal cliff” — the agreement just reached by Congress merely kicks the can down the road. And when the time finally comes to making cuts, big-ticket defense spending always finds itself on the radar.
This isn’t a good sign for UTX, considering that it is America’s fifth-largest government contractor. For example, in 2011, nearly one-sixth of its $58 billion in revenues came from government contracts.
To be fair, United Technologies also has plenty going for it. The aforementioned Goodrich deal is expected to add about $8 billion to UTX’s $58 billion in revenues, and the company is expected to grow earnings nearly 20% in the next fiscal year. Plus, the company offers a 3% dividend that screams security, and has been making payouts like clockwork for almost a quarter-century.
Still, UTX shares have struggled to maintain positive ground since early 2010, the company now has an enormous sum of debt weight around its neck, and it faces large uncertainties surrounding U.S. spending. United Technologies still has a sturdy business, but it’s a mega-cap you still should consider avoiding — at least for now.
As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.
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