When constructing a long-term diversified portfolio, both investors and lazy money managers will just toss in familiar large-cap names because they are “no-brainers.”
As soon as I hear that, I get nervous. It is far too easy to drop familiar large-cap stocks into a portfolio just because they have always had a place in such a portfolio.
But times change, and so has portfolio construction. One can’t just drop in any name from the universe of large-cap stocks, because proper stock selection has not only to do with individual stocks themselves, but how they interact with other stocks in the portfolio as far as risk tolerance.
There are, however, a few names that I would consider “must-own” from the universe of large-cap stocks. I haven’t selected these willy-nilly — they are part of a careful review of large caps that I believe have a place in any long-term diversified portfolio.
Large-Cap Stocks to Own: Berkshire Hathaway (BRK-B)
Yes, I do believe that Berkshire Hathaway (BRK-B) belongs in any given portfolio of large-cap stocks.
One of the primary reasons is that the company itself is a diversified conglomerate. It’s like holding a mutual fund, with every important facet of the American economy represented.
The key to long-term portfolio success is diversification, so if I can find quality large-cap stocks that are themselves something other than a one-trick pony, I’ll take a hard look at them.
Yet Berkshire has more going for it, including that it has one of the most reliable and stable businesses at its core: insurance. You are getting one of America’s best insurance brands when you buy Berkshire, and that means highly predictable returns on capital, as well as cash flow.
Finally, Berkshire is not going anywhere. It may have tough times, but it has always bounced back, and led the market in doing so.
Large-Cap Stocks to Own: Amazon (AMZN)
While I think selecting Apple (AAPL) is absolutely right for this article and a must-own stock, I’ve written a lot about it lately. So setting that winner aside, I’m going to instead suggest Amazon (AMZN).
For starters, it has about half the market cap of Apple, so it has further to run.
It may also surprise readers that I should choose a company whose net income is all over the place and highly unpredictable. But net income is not everything when it comes to valuing a company. I place tremendous value on free cash flow, and Amazon has it to the tune of $2 billion each in fiscal year 2013 and 2014.
Amazon already is the greatest retailer in the world, yet I believe it is just getting started. CEO Jeff Bezos is a visionary, and you always put your money with visionaries.
All of Amazon’s experiments are going to lead somewhere.
Large-Cap Stocks to Own: MasterCard (MA)
You also have a choice when it comes to this last selection, but I’m going to suggest MasterCard (MA) over Visa (V), although truthfully, either one works. MasterCard is 40% smaller in market cap, but has slightly better-quality earnings and balance sheet.
In this case, you are dealing with an effective duopoly. Yes, there are other players like Discover (DFS) and American Express (AXP), but V and MA are really the big players, and they just continue to expand their offerings.
I also believe that the financial services sector is going to be innovating and adding more products for consumer in the coming years, and these two firms will be leading the charge.
The other exciting thing for both of these companies is that China has finally opened up to them. They don’t have to joint-venture with existing, government-controlled UnionPay. They can operate on their own, in competition with UnionPay and other online payment companies.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing he owned shares of BRK-B and AAPL. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
