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Size Isn’t Everything: 3 Mega-Caps to Avoid

Just because it has a big market cap, doesn't mean it's a good pick

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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

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.

Article printed from InvestorPlace Media,

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