I have spent a lot of time in recent weeks considering large-cap stocks to sell. It doesn’t take an epiphany of epic proportions to see that markets are once again flirting with all-time highs.
Investors have flocked to the large, well-known companies, and in many cases, the valuations have reached levels where it is no longer reasonable to assume decent returns from these issues. Large-cap stocks in general trade at very high enterprise-value-to-earnings-before-interest and taxes ratios, price-to-earnings ratios and price-to-book-value ratios.
I was asked the other day if there were any larger companies I thought might be worth buying, and while they are few and far between, there are some large companies that long-term investors may want to consider. I prefer to use the EV/EBIT ratio to value non-financial stocks, as that’s the measure used by other buyers such as LBO and Private Equity funds.
The following are three of the best large-cap stocks to buy for long-term investors.
Large-Cap Stocks to Buy for Long-Term Gains: First Solar, Inc. (FSLR)
EV/EBIT Ratio: 4.21
Shares of solar module manufacturer First Solar, Inc. (FSLR) have struggled this year. Solar capacity is running ahead of demand right now, and although there can be little doubt that changes in the future, for now it is depressing the stock as investors avoid solar-related stocks.
The dismal performance of solar yieldcos and other solar operators has also kept a lid on the stock price in 2016. However, there can be little doubt that solar will play in increasingly larger role in the energy industry and FSLR should be able to grow at a strong pace selling its modules to solar plants in the years and even decades ahead.
Right now, the stock is selling at the lowest EV/Enterprise multiple in the large-cap universe. It is worth further consideration by investors looking for long-term exposure to the solar power sector.
Large-Cap Stocks to Buy for Long-Term Gains: HP Inc (HPQ)
EV/EBIT Ratio: 6.28
After spinning off its enterprise software business, Hewlett Packard Enterprise Co (HPE) last year, HP Inc (HPQ) is a now a pure play on the printer, computer and related services and accessories.
Although this is a tough and competitive business, I think HP will continue to be a market leader, and it can prosper. They have a strong balance sheet and produce lots of cash flow, so they can return capital to shareholders in the form of dividends and buybacks, and that should enable shareholders to prosper as well.
The shares yield 3.8% right now and the company bought back 28.7 million shares of common stock in the first quarter of the year. Investor concerns about the PC and printer markets have kept the stock relatively inexpensive, and HP currently trades at an EV/EBIT multiple of just 6.28 right now.
I think this price totally ignores long-term opportunities in the business printing market and 3D printers that can drive future growth for the company.
Large-Cap Stocks to Buy for Long-Term Gains: KBR, Inc. (KBR)
EV/EBIT Ratio: 3.88
KBR, Inc. (KBR) is a global technology, engineering, procurement and construction company serving the energy and government services industries.
While there is near-term weakness in the energy markets, the long-term truth is that money on energy infrastructure like on- and off-shore production facilities, liquefied natural gas infrastructure and refining facilities will eventually have to be spent.
In the meantime, the government services division is healthy and signing long-term contracts that should prove rewarding to the company. It just bought Wyle, a company that provides specialized engineering and other technical and scientific services primarily to the U.S. federal government and expands KBR’s government operation with a backlog of over $1 billion in new projects.
Market uncertainty has kept a lid on the shares and the stock has an EV/EBIT ratio of just 3.88 right now.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.