Large-cap stocks have led the market in recent years. But not all large-cap stocks have done so.
But for every AAPL and MSFT, there’s been a General Electric (NYSE:GE) or an Anheuser-Busch InBev (NYSE:BUD) or even a 3M (NYSE:MMM). Large-cap stocks that have struggled quite often have struggled mightily.
Of course, that split echoes that of the market as a whole. With rare exceptions, ‘too expensive’ has not been a good reason to sell, and ‘too cheap’ not a good enough reason to buy.
Does that trend hold? With large-cap multiples at historically high levels, valuation concerns presumably arise at some point. Whether that point arrives next year, however, is a different story.
Whatever broader 2021 trading looks like, these four large-cap stocks have at least a path to prosperity. And their rallies could begin in relatively short order. So, for varying reasons, each of these four large-cap stocks looks attractive at the moment:
Now, let’s dive in and take a closer look at each one.
Large-Cap Stocks to Buy: Becton, Dickinson (BDX)
It would seem like a large-cap manufacturer of medical supplies, medical devices and lab equipment would be doing exceedingly well in the current environment. That kind of business is defensive, which is an attractive quality during a time of (mostly) heightened volatility. The novel coronavirus pandemic suggests a boost to revenue and profits that isn’t going to instantly end when a vaccine arrives.
However, BDX stock actually has declined nearly 10% so far this year. That’s in part because the pandemic actually had a rather significant negative effect on the business this year. Reduced health care utilization outside of Covid-19 treatment sent revenue down 1% for fiscal year 2020 (ending Sept. 30). Adjusted earnings per share declined more than 31% year-over-year.
Becton, Dickinson, however, expects to bounce back strongly. The company guided for 20%-plus adjusted EPS growth in FY2021. And Covid-19 testing revenues should reach roughly $1.5 billion.
In other words, BDX stock is a defensive “return to normalcy” play. That’s a rare, and attractive, combination. Yet, shares trade at roughly 19 times this year’s guided EPS.
Investor attention already is turning toward normalcy, leading sectors like travel and industrials to rally. Thus, BDX stock should benefit from the same tailwind at some point — and an attractive valuation makes the stock easily cheap enough to wait.
Netflix stock is stuck. NFLX first cleared $500 back on July 7, with an intraday high just shy of $505.
To be sure, NFLX stock still has had a torrid 2020, with a 61% rally. But it was the tailwind driven by “stay at home” orders that drove nearly all of those gains. Shares have badly lagged the market for over five months now.
Nonetheless, that should change in 2021. Other streaming services have been the focus in recent months, with Disney (NYSE:DIS) the most notable. Investors seemingly keep looking for the “next Netflix,” while ignoring the massive head start Netflix itself already has. For now, at least, streaming rivals are playing for second. The market will remember that at some point.
Admittedly, NFLX stock isn’t cheap, at almost 58 times consensus EPS for 2021. But, again, “too expensive” has not been much of a problem in recent years, as long as companies keep driving growth. With Netflix adding millions of new customers this year, and plenty of whitespace overseas, that growth should continue. If it does, NFLX will get back to its rallying ways again, with the fourth-quarter earnings report in January a potential catalyst.
Large-Cap Stocks to Buy: Ericsson (ERIC)
The market has given investors another shot at Ericsson stock. I argued toward the beginning of this year that ERIC stock was the best 5G wireless play, and for a while that call looked prescient. After a blowout second-quarter report in July, ERIC had rallied more than 20% year-to-date in a market that had only then clawed back March losses.
Since that release, however, ERIC has traded sideways. The stock then fell 5% on Friday after the company disclosed a battle with Samsung over licensing revenue. The pullback looks like an opportunity.
After all, the 5G opportunity remains, and indeed is still in the early innings. Rival Nokia (NYSE:NOK) continues to struggle, while China’s Huawei has been hindered by political pressures. The Samsung news is a modest concern, but those battles usually are resolved with relatively little impact (witness the supposedly epic fight between Apple and Qualcomm (NASDAQ:QCOM) a couple of years back). Headlines will fade soon enough.
Moreover, at nearly 16 times forward earnings, ERIC stock is pricing in most of the risks — but little in the way of rewards. As a result, what was the best 5G play during the first half of 2020 seems likely to be the best 5G play during the first half of 2021 as well.
J.M. Smucker (SJM)
SJM stock looks attractive, but I’ve thought it was attractive for quite some time. Three-plus years of sideways trading has left shareholders with little but admittedly attractive dividends.
There are challenges. SJM stock is cheap, but so are most other packaged food plays. The company is trying to pivot to faster-growing categories, but so are the likes of Campbell Soup (NYSE:CPB) and General Mills (NYSE:GIS). Those stocks have posted relatively similar performance to SJM over the past three years.
However, perhaps 2021 will be the year when the SJM bull case finally plays out. Smucker’s Investor Day last week included long-term growth targets of 8% annually in adjusted EPS, with double-digit shareholder returns each year. Cost-cutting and a larger focus on pet food and coffee should accelerate top-line growth and boost margins.
To be sure, investors have heard this story for some time, and Smucker hasn’t quite delivered on its promise yet. But as the old saw goes, it takes time to turn around a battleship. And with SJM stock pricing in basically zero growth, even falling somewhat short of the earnings targets still could leave J.M. Smucker delivering those attractive double-digit annualized total returns.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.