5 Large-Cap Stocks to Buy for the Price of One

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Alibaba is set to go public on Sept. 18, when it will raise as much as $24 billion in its New York Stock Exchange debut. Based on the 320 million depositary shares Alibaba plans to sell, it will go public at a value of $163 billion — making it the third biggest internet firm behind only Google (GOOG) and Facebook (FB).

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Source: ©iStock.com/gunnar3000

As stocks to buy go, it’s a biggie.

Institutional investors will be clamoring for shares in the e-commerce giant while retail investors aren’t likely to be nearly as rabid about Alibaba stock. It seems hardly anyone in America has heard of the Chinese company despite generating annual revenues that are greater than Amazon (AMZN) and eBay (EBAY) combined. It’s definitely a comer … but it’s not yet on most people’s list of stocks to buy.

For those who’ve never heard of Alibaba and don’t want to take a chance on an unknown quantity, let me suggest five large-cap stocks to buy whose combined market cap is less than Alibaba’s.

Why buy one when you can have all five for the same price?

My target for each of the five stocks to buy in terms of market cap is $30 billion, give or take a billion. I’ll select one stock from five different sectors, all of which generate above-average sector and industry returns. At the end I’ll have created a portfolio that can stand on its own.

Large-Cap Stocks to Buy – Services

CBS185While there are a lot of interesting possibilities around the $30-billion mark when it comes to service companies, my ultimate choice is CBS (CBS), for three key reasons:

1. CBS is moving away from a business model that’s driven by advertising to one that’s more reliant on recurring revenue streams such as retransmission fees, which it receives from cable and satellite providers to retransmit its signal. In 2014 those retransmission fees will be $550 million but are expected to increase to $2 billion by 2020. This portion of the business provides much higher margin, so the future bodes well for CBS shareholders.

2. Its cable networks — Showtime, CBS Sports, and Smithsonian — continue to be the company’s most profitable cash cows. In the second quarter ended June 30, the cable networks generated $219 million in operating income before depreciation and amortization, resulting in an OIBDA margin of 42%, two percentage points higher year-over-year.

3. CBS trades at a discount to its peers. It currently trades at 12 times its projected 2016 earnings while its peers trade for 14 times. With a $6 billion share repurchase under way and a 25% increase in its quarterly dividend, CBS shareholders have been given yet another reason why CBS is one of the best stocks to buy in the services sector.

Large-Cap Stocks to Buy – Consumer Goods

VFC Corp.The sale of jeans declined by 6% in 2013 (the first time in decades) as consumers opted for yoga pants and other casual attire over denim. Articles warning of an uncertain future are showing up everywhere as retailers such as Lululemon (LULU) take market share from traditional denim manufacturers.

It’s become such a hot trend that media now refer to yoga wear and sweat pants as being in the “athleisure” market. VF Corp. (VFC) has both sides of the coin covered with Lee, Wrangler, Rustler and Seven For All Mankind jeans, and Lucy activewear for yoga and sweats.

The great thing about VF is it’s so much more than jeans and activewear. Other brands driving revenue at the North Carolina firm include Timberland, Vans, The North Face, Nautica and so many more. It’s an apparel conglomerate that continues to buy well-known brands (E.g., Timberland and The North Face) and then makes them even better. When it comes to my five picks of large-cap stocks to buy, VFC is probably the best of the bunch.

Large-Cap Stocks to Buy – Technology

CognizantI’m not a tech geek so this is the hardest of my five selections. Generally, though, I like to invest in businesses that have strong cash flow, and tech businesses often do. Cognizant Technology Solutions (CTSH) is my choice here, as it appears to be gaining market share in the highly competitive world of business process outsourcing. In the second quarter CTSH signed up three new clients who will deliver $3.5 billion in value over the life of those contracts, with $200 million coming in 2015 alone.

Its revenues are expected to grow 14% in 2014; although that’s a more conservative outlook than in February when it called for revenue growth of 16.5%, it’s still plenty. Cognizant has achieved sequential and year-over-year growth in Q2 in all four of its reportable segments, and with the exception of the U.K., it’s doing just fine in every region of the world. With free cash flow in 2014 likely more than $1.4 billion you can be sure that it will buy back a significant amount of its stock given the $2 billion share repurchase program in place.

Morningstar gives it 4 stars and I can see why. Cognizant has increased operating income in each of the past 10 years, making CTSH one of the most consistent operators in tech (or any other sector, for that matter). Down 8.5% year-to-date through Sept. 7, I’d say now is as good a time as any to consider buying. It’s definitely on my list of large-cap stocks to buy.

Large-Cap Stocks to Buy – Industrial Goods

Deere logo DE stockI just can’t seem to lay off Big Green — that’s Deere & Co. (DE) for the uninitiated. The Moline-based tractor and combine maker just can’t seem to get out of first gear in 2014, down 8% year-to-date. Farm and construction equipment companies are generally having a tough time this year as commodity prices, especially corn, have dropped dramatically and are likely to continue heading south for some time.

Not to worry, because Deere has a brand that’s been built over 200 years. Its economic moat is substantial and Deere is currently taking market share from weaker competitors around the world.

Currently undervalued compared to its peers, DE stock’s four-year underperformance suggests it will soon begin a new leg up that will take it to $100 and beyond. In the meantime enjoy the 2.8% yield while you wait for one of America’s most iconic brands to power higher.

Large-Cap Stocks to Buy – Financial Services

Brookfield Asset Management logoI couldn’t help myself. I just had to pick at least one Canadian company — and no, I’m not selecting one of Canada’s “Big Six” banks. It seems they’re getting the cold shoulder from rating agencies these days because the Canadian government plans to introduce legislation to protect Canadian taxpayers from any future bank bailouts. (As a Canadian I’m very happy to hear that I won’t be on the hook for a bank’s overzealousness.)

No, my pick in the financial services space is Brookfield Asset Management (BAM), which manages $200 billion in assets around the globe. Investing in four major asset classes — Property, Renewable Energy, Infrastructure and Private Equity — BAM continues to generate hefty profits for its shareholders. In the second quarter ended June 30, BAM generated $569 million in funds from operations, 23% higher than a year earlier.

Recent moves include buying an $800 million office portfolio in India and an Ireland wind farm for $690 million. Brookfield believes emerging market and European valuations are far more compelling than those in the U.S. I’d expect a lot more news from these two areas of the world.

In terms of performance, BAM stock has seriously outperformed Berkshire Hathaway (BRK.A) over the long term. That in itself is reason to buy.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/5-large-cap-stocks-to-buy/.

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