by James Brumley | August 3, 2012 8:05 am
There’s no denying that investing in a big huge company can feel a little cliché. You hear about them through the financial news, you likely use their products, and odds are good the little old lady across the street even has a few shares tucked away for a rainy day. Point being, if a pick is that obvious, surely it’s been fully tapped, right?
Ehhh … maybe. But maybe not.
While the market might be 100% efficient when it comes to spreading information about a company (and the bigger the company is, the more effective the market is at spreading the info), that doesn’t mean investors are 100% right about how to interpret that information. The reality is, traders can just as easily overlook an opportunity with a major company as they can with no-name micro cap.
With that as a backdrop, though large caps and mega-caps have been outperforming the rest of the market lately, there are a handful of monster-sized corporations that sill have a lot of untapped upside ahead. Here are four of the best:
Could there be a more predictable mega-cap pick than General Electric (NYSE:GE)? Probably not. Yet, here it is, for all the right reasons … finally.
Click to Enlarge In 2008, when the recession took a bite out of every corporation’s profits, nobody expected GE to be immune. And it wasn’t. The bottom line fell from 2007’s peak of $22.2 billion to $10.7 billion by 2009.
Unlike most other companies, however, General Electric never really started to dig its way out of the hole. Last year’s income of $13.1 billion still leaves the company oddly out of the rebound most of its peers have been able to muster, leading some investors silently — and some not so silently — asking if Jack Welch still was available. Fret not, though, because it looks like this American icon has finally turned the corner.
There are several reasons why, though only two overarching ones (which happen to be related). One, the company has finally transitioned from being a finance company to an industrial one, and two, the company has gotten near the end of a transition from supplying low-growth industrial goods to supplying more modern, marketable ones. Said more directly, GE now is a big energy-related player, and particularly a strong player in green energy. It took four years to get there, but next year’s expected income growth of 12% is apt to be just the beginning for a new-and-improved General Electric.
The market doesn’t seem to have quite caught on yet, but one more good nudge above the long-term ceiling at $21 could start the fireworks.
True, not every major bank out there has worked its way past the mountain of headaches stemming from 2008’s subprime meltdown. Wells Fargo (NYSE:WFC) has, however, and it has the numbers to prove it. Take last year’s income as an example. 2011’s bottom line of $15.0 billion was 29% better than 2010’s $11.6 billion, which was 45% better than 2009’s $$8.0 billion. You get the idea — if any stumbling blocks were left, they would have popped up by now.
Granted, with mortgage lending revenue growing by 80% last quarter on a year-over-year basis, some might argue that the hot growth streak from Well Fargo also is a vulnerable one. Again, though, if the housing market really is as bad as many want to believe it still is, then the mortgage business already is dealing with its worst-case scenario.
Putting an old-school industrial name like GE on the same list as an ultra-nouveau digital holding like Google (NASDAQ:GOOG) might catch some investors off guard. But, both behemoths belong here … just for different reasons.
Click to Enlarge In retrospect, it’s kind of funny. In every year since, say 2006 or so, more than a handful of prognosticators have asked themselves — and answered publicly — whether Google has peaked, meaning it has run out of ways to grow revenue and income. In every year since then, Google has cranked up the bottom line, from 2007’s $4.2 billion to last year’s $9.7 billion.
The doubters continue to dominate, considering the stock’s recent (non)action; Google shares still are struggling with a technical ceiling at $632. Nothing has been able to stop earnings growth yet, though, and there’s not much likely to do so in the future as Android-powered machines continue to proliferate and the company continues to widen its web through Google Wallet, Google+, Google TV, and serving as an ISP (in some locations). There are no growth barriers.
Last but certainly not least, International Business Machines (NYSE:IBM) — aka IBM or “Big Blue” — is one of those names with a stock that can gyrate, but an income-growth streak that won’t.
Click to Enlarge Try this on for size: The last time IBM didn’t grow its quarterly income on a year-over-year basis was in Q4 of 2004. You read that right. That’s 30 quarters of reliable YOY profit growth. Uncanny. Yet, given the recurring revenue nature of its service business, there’s not much that’s apt to disrupt that growth streak in the future.
Ergo, the way to play IBM is by buying it on the dips, kind of like the 11% pullback we saw between April and July. At 14.2 times its trailing income, it’s not like there’s a valuation problem here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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