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Large cap stocks aren’t always safe. These are.
There is a mistake that a lot of investors make, particularly retired investors, and it has to do with large cap stocks. There is a misconception that somehow large cap stocks have a higher degree of safety to them, partly because they are just large, but also because they are somehow established and have stood the test of time.
It’s a dangerous misperception to have, because there are two types of large cap stocks you should avoid, particularly in this market. The first kind of large cap stock to avoid is the momentum stock. These are companies that are flying high due solely to momentum buying on the part of institutions and retail investors.
There may be a viable business in that large cap momentum stock, but at the moment, it is grossly overpriced because euphoria rules the day and not P/E ratio. Remember what happened when the dot-com bubble burst? Stocks like those got killed.
The other loss leaders are large cap stocks like Proctor & Gamble (NYSE:PG) and Pfizer (NYSE:PFE). These companies exude an aura of safety, but the truth is that they are fundamentally moribund businesses, with little revenue or EPS growth. They pay a very modest dividend, but the false perception of safety has driven their stock prices well beyond what I’d consider reasonable.
That’s why you should stay with large cap stocks that will stand the test of time. They are growing, and while some downside exists should there be a market correction or even crash, they are going to be the first to leap back to their feet. And they will soldier on.
No. 1 Walt Disney
Walt Disney (NYSE:DIS) is a massively diversified entertainment entity at this point, with holdings all across entertainment. It has purchased Marvel, Pixar, and LucasFilm, which gives it another 60 years worth of content to mine on proven franchises and studios. It owns TV networks, radio, theme parks, cruise lines, toys, games…you name it. The result is that it produces billions in free cash flow every year, and remains a global brand name second to none. Its financials are stellar, it pays a small dividend, and is incredibly well-managed by Robert Iger.
No. 2 Wynn Resorts
Wynn Resorts (NASDAQ:WYNN) has one single thing going for it: Steve Wynn. I wouldn’t want anyone else at the head of a gaming/resort company. He has been in the business for fifty years, and been through every kind of economic cycle known to man. He knows how consumers behave, and responds to them, changing as needed with the times. That includes expanding into Macau and tweaking his operation to fit the international visitor. Wynn has never overleveraged, and came through the financial crisis in pristine fashion.
No. 3 General Electric
General Electric (NYSE:GE) is the cockroach of the stock market – not in terms of it being a gross bug that everyone hates – but as the ultimate survivor. For well over one hundred years, GE has innovated its business, morphing into a global conglomerate whose reach extends far beyond light bulbs. GE is never going to give an investor mammoth returns in the short term, but over the long-term, it is the tortoise – plowing ever onward, with tons of cash on hand, tons of free cash flow, and a dividend that will never get cut.
No. 4 Google
Afraid to invest in Google (NASDAQ:GOOG)? Don’t be. Yes, the stock can be volatile and may even remain so for some time to come. It may even feel like a momentum stock. Google’s momentum days are really gone, though. It is the company of the present and future that I think of an the online General Electric. I believe in 30 years it will represent multiple business disciplines both offline and online, and will continue to grow its massive cash hoard well beyond its current size. It has the money to invest in every new technology, and the subsequent result is that if even one pays off, it will pay off handsomely and make all the other investments worthwhile. Investing in Google now is like investing in GE in 1901.
No. 5 Amazon
Finally, we have a similar play in Amazon (NASDAQ:AMZN). I was skeptical of the online bookseller for a long time, until Amazon became the ultimate online shopping mall….and keeps growing into other arenas beyond this. On the retail side of things alone, the notion of buying something in a store is going away slowly but surely. I buy almost everything online at this point, and 90% of it is from Amazon, and using the Prime service. Beyond retail, Amazon is akin to Google, in that Jeff Bezos is using Amazon’s cash hoard to invest in R&D. It may also become a modern-day GE, and its portfolio theory of investment will also pay off. No matter what, however, it will always have the successful retail base to keep it afloat in bad times.
These are the five stocks I would buy and tuck away for your kids. You’ll be able to sleep well at night, also.
Lawrence Meyers owns shares of DIS, GE, and AMZN.
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