Why on earth would anyone want to buy a stock of a company with a market capitalization of more than $100 billion? While it is true large companies can crush the competition and dominate markets, growth often is elusive once you reach that size.
Given that future profits in the stock market are a function of profit growth, owning a $100 billion stock makes little sense. It is far better to go small. Think about it. A company that is making $10 million in profits needs to improve by $2 million per year to reach 20% profit growth. A large company with 10 billion in profits needs to add $2 billion per year to match that growth.
Do you realize how difficult it is to add $2 billion in new profits in a given year? Trust me. It is difficult. As such, I would avoid these five $100 billion companies. They might look like attractive stocks, but they are not. They are just the opposite — and not worth a dime of your money.
The Oracle of Omaha is perceived to be a savvy investor, but the joke might be on you if you buy A shares of Berkshire Hathaway (NYSE:BRK.A). The $185 billion investment management company might look like a great stock to own given the insights and management of Warren Buffett, but buying a big stock like this at premium prices is not a smart thing to do. I’m pretty certain Buffett would not buy shares of his own company at these levels.
There is nothing inherently wrong with what Buffett is doing, but given the size of the company, there are simply fewer opportunities for Berkshire to grow profits. The company made a few splashes during the financial crisis but has been fairly silent since. Having to buy bigger and bigger companies dilutes the value of their investment. Large companies tend to be fairly priced, as there are no secrets. I would stay away from this one.
Petroleo Brasileiro S.A. (Petrobas)
If one thing was proven during the recent U.S. debt crisis debate, it is that our currency and treasury securities still are the king of the hill with respect to global markets. Now, with a deal complete, the dollar will be even stronger. At the same time, there will be pain in getting our house in order. And a strong dollar and a tough economy will cause a drop in commodity prices.
As such, I would avoid a stock like Petroleo Brasileiro (NYSE:PBR). The $223 billion market-cap company is doing great with oil hovering around $100 per barrel. What happens when oil prices drop by $20? Shares are likely to trade at late 2008 levels, or $20 per share. There is too much risk and not much reward in this big-cap stock.
One glaring weakness uncovered during the housing collapse and financial crisis of 2008 was that certain financial institutions had become too big to fail. The subsequent rescue of these behemoths gave the illusion that these companies would be protected at all costs. That was then, this is now. I’m not convinced governments and central banks would do everything possible to save the next large big bank or Wall Street firm in trouble.
Losing that protective blanket, then, increases the risk of owning a stock like HSBC (NYSE:HBC). The $175 billion global bank has its tentacles in all things currently troubling to the financial markets including the debt crisis in Europe. HSBC might not be the first domino to fall, but there is a scenario out there where they would fall, indeed.
Absent that risk, the growth prospects for such a large bank do not look promising. The company recently announced big layoffs that reflect the challenging environment. It sounds like more retrenching and balance sheet repair is in order here. I would avoid this stock.
Often, the only way for a giant company to grow is to get bigger. The profit chase becomes more about swallowing competitors than it is about innovation and organic growth. American Movil (NASDAQ:AMOV), the large Latin American telecommunication company, made the move Monday to acquire the remaining stake of fixed-line operator Telmex. The deal will bring together the interests of billionaire Carlos Slim. I’m not so sure what the move will do for America Movil investors.
As is often the case, America Movil shares slid on the announced attempt to acquire the outstanding shares of Telmex. Typically, mergers of this sort fail to deliver added value to the acquiring company. More importantly, the deal might raise the specter of government scrutiny. Already blasted by the government for anti-competitive moves, America Movil, by consolidating its power, is likely to bring more attention to its operations.
Monopolistic power and its consequences are just one of the many risks of owning a $100 billion stock. The natural tendency is to keep growing, but not if governments become concerned about competition. The stalemate can be disastrous for investors in these big companies. Without growth there can be no stock appreciation, but if governments raise issues, what are you going to do? I would simply rather put my money elsewhere.
One of the gimmicks used by companies in distress is to perform a reverse stock split. When shares are perceived to be valueless and trading for a low dollar amount, executives will do anything to support the stock price. The idea behind a reverse stock split is to take shares off the market, thereby artificially raising the dollar value of remaining shares. Nothing about the intrinsic value of the company performing the reverse split has changed.
When $111 billion market-cap company Citigroup (NYSE:C) performed its own reverse stock split, investors should have run to the exits. Instead of attempting to grow its business or creatively solve balance sheet problems, management tries to pull a rabbit out of the bag by changing investor psychology. The trick is not working. Since the May 9 reverse split, shares of Citigroup have lost 13%. The split cannot hide fundamental problems with this company. I would sell this stock.