The Bigger The Better
After beginning the year in a steady uptrend, stocks are now bouncing around. This volatility is not necessarily unfavorable as long as current economic trends continue although it tends to terrify those whose investments are hampered by their emotions. The remedy for market volatility is twofold. First, use market dips to add to portfolios rather than selling in fear. Second, when facing uncertainties, favor stocks in larger companies.
In stock investing, it is a truth universally acknowledged that returns on small cap stocks exceed those on bigger companies. After all, the risks inherent in buying something like a Chinese Internet company rather than IBM would logically seem to demand potentially higher returns. Studies of long-term investment returns support this logic although closer studies suggest that it may largely be due to spurts of small cap outperformance during periods of strong investor confidence.
The market is currently making nice progress despite continuing investor skepticism. Indeed, the time to take profits will be when market gains bring the jubilee of exuberant overconfidence. Today’s exacting economic conditions favor the stronger companies that have capital to invest in productivity and to expand their global reach into promising markets.
As a result of these factors, the combined sales, profits and employment of the 500 larger companies that make up the S&P500 Index now exceed their totals in 2007, before the financial crisis and recession. There is still a place for smaller companies like American Vanguard (AVD-$25) but modern markets favor big caps.
Apple (AAPL-$622), once a small cap, has achieved the biggest capitalization of any private company. Now a dividend paying stock, it belongs in almost any portfolio. Its next quarterly earnings report comes on April 24 and the company usually exceeds analyst forecasts.
I am adding Yum!Brands (YUM-$70), which operates over 37,000 restaurants under the KFC, Pizza Hut and Taco Bell brands. Its KFC restaurants are clear winners in China over slower growing McDonald’s. It also operates 450 casual dining concept restaurants in China. Sales are over $12 billion, growing at 15% with earnings growing even faster. Yield is 1.6% with increases for seven years.
The larger pharmaceutical stocks are strengthening and are still quite reasonably valued overall. Current buys are Novo-Nordisk (NVO-$145), Merck (MRK-$38), Bristol-Myers (BMY-$32) and Novartis (NVS-$55). Abbott Labs (ABT-$59), which is dividing its main medical supply lines from its drug division, also remains a buy. This sector lagged amid continuing political quarreling over how to pay for its products but their necessity insures continuing growth, particularly for the more soundly capitalized large companies.
Increasing global demand also provides a strong foundation for energy companies. Problems on the supply end in the Middle East are adding uncertainty to oil prices and I am concentrating new buys in ConocoPhillips (COP-$74), which is splitting its upstream exploration and production from its downstream marketing operations. Norway’s Statoil (STO-$25) is a possible repeat recommendation.
Broadcom (BRCM-$37) with $7 billion sales has less than half the sales of Qualcomm (QCOM-$68) but is more reasonably valued. I am adding Broadcom as a new buy, noting its participation in several Apple products. Qualcomm is also well placed and I expect good years for both companies.
Nokia (NOK-$4), despite over $50 billion sales, was knocked down to its book value on problems with its new Lumia phone. This is an unusual speculative turnaround recommendation but the company’s size provides a reasonable basis for recovery. There is even a $.26 dividend expected next month.
By then, we will be through the current earnings season and stocks should be settling down. That is never a guarantee, however, larger stocks will add stability and, in all probability, continuing gains.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/