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Stock Strategist

Large-Cap Stocks to Watch

These big-name winners are selling at a discount.

Large-cap stocks--which Morningstar defines as stocks with market capitalizations of about $8.5 billion and above--have been sorely out of favor in recent years. While small-cap stocks have surged ahead, large caps--particularly big growth stocks--haven't kept pace. After reaching dizzying valuations in the late 1990s, large stocks were crushed in the bear market, and many haven't kept pace with smaller-cap issues as the has market recovered. As a result, the Morningstar Large-Cap Index has posted annualized losses of more than 3% per year over the trailing five-year period.

But it would be a mistake to write off this segment of the market. Indeed, while market valuations are relatively steep across the board, valuations on the market's biggest names aren't quite as nosebleed-inducing as those on small-cap issues. There's also something to be said for owning large companies that have consistently generated top- and bottom-line growth in a variety of market climates.

For this week's Stock Strategist, we began by screening for stocks that are part of the Morningstar Large-Cap Index. Next, we looked for companies that have consistently increased both revenues and earnings per share over the past several years. Finally, we added quality screens for return on equity and financial health.

While not all of the stocks that passed are cheap enough to be compelling right now (perennial large growth-stock favorite  Starbucks (SBUX), for example, is trading above our fair value estimate), it's worth keeping an eye on this list for the large-cap segment of your portfolio. Here are some highlights:

3M Company (MMM)
Morningstar Rating: 5 Stars
Business Risk: Below Average
Investors were surprised when CEO Jim McNerney left the company for the top job at Boeing. Despite the change, we like 3M's prospects. From the  Analyst Report: "Although this was a surprise move, we don't consider it to be a cataclysmic event or a signal that there are deeper issues at 3M. McNerney was successful in altering the culture throughout the company and we doubt his absence will suddenly cause 3M to forsake his discipline and methodology. McNerney's successor should be able to take advantage of the slimmer 3M by putting more focus on product development and ultimately growing the company."

Avon  
Morningstar Rating: 4 Stars
Business Risk: Average
Avon recently received permission to set up its direct-sales model in China. While this created some problems with the firm's current Chinese retail partners, who stand to lose as direct sales gain steam, we think China represents an attractive opportunity for Avon. From the  Analyst Report: "Avon's torrid growth over the past five years can be chalked up to its success in exporting its direct-selling techniques to emerging markets. The personal-sales format for cosmetics presents a powerful opportunity to women in emerging economies, and because Avon can set up shop quickly, it is able to move into new markets that daunt its competitors. The low initial capital investment to move into new markets--and the company's strong return on this investment--has dug Avon a wide moat."

Johnson & Johnson (JNJ)
Morningstar Rating: 5 Stars
Business Risk: Below Average
From the  Analyst Report: "We like J&J's global leadership positions in three attractive health-care business lines: pharmaceuticals, medical products, and consumer products. Each line has excellent long-term growth prospects driven by favorable demographic trends or structural shifts in the U.S. economy toward quality-of-life services. The multiline platform provides valuable diversification in the event of an adverse development in any single business line."

Paccar (PCAR)
Morningstar Rating: 4 Stars
Business Risk: Average
We liked what we saw on a recent visit to this truck maker. From the  Analyst Report: "PACCAR's top-quality products, flexible business model, and consistent profitability in the highly cyclical truck-manufacturing industry are impressive. Cost structure flexibility has enabled PACCAR to achieve 66 consecutive years of profitability; this is particularly impressive considering that profitability in the industry depends mostly on volume, which can shrink 20% or more in a year in particular regions."

Sysco (SYY)
Morningstar Rating: 5 Stars
Business Risk: Below Average
Sysco could face some short-term pressure as high gas prices crimp consumer discretionary spending and Wendy's, its largest customer, faces stiff competition from McDonald's and Burger King, but the company enjoys numerous competitive advantages. From the  Analyst Report: "Sysco remains the most dominant food-service distributor, in our view. The company continues to pump out large returns in a low margin business, thanks to leading economies of scale and a powerful product portfolio. Sysco exhibits the very traits we look for in a wide-moat company."

To run this screen and see all the stocks that pass,  click here. Note: The stocks mentioned above passed our screen as of Aug. 8, 2005. The results may change due to daily price fluctuations or other factors. After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (You will need to be logged in as a Premium Member to view and save the complete screen.)

A version of this article was last published on Jan. 31, 2005. It has been revised and updated.

 

 

 

 

 

 

John Novak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.