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Holly LaFon
Holly LaFon
Articles (8062) 

Large-Cap Stocks No Longer Undervalued

September 18, 2012 | About:

Last year, many investors were interested in mega-cap stocks, as they seemed to be undervalued. For instance, FPA Funds’ Steven Romick went on WealthTrack with Consuelo Mack in July 2011 to discuss why CVS (NYSE:CVS), Walmart (NYSE:WMT) and Microsoft (NASDAQ:MSFT) were cheap at the time. However, the picture for these and many high-quality, big-market-cap stocks has changed, and they may have become not as good bargains as they once were. Just three mega-cap stocks currently have single-digit P/E ratios. Here are some large caps whose valuations have become less attractive recently.

Walmart (NYSE:WMT)

Walmart has the fourth-largest market cap of U.S. stocks, according to GuruFocus’ All-in-One Screener. One year ago, the company had a P/E ratio of 11.13. The P/E has steadily increased since then to trade above 15 all summer and stand at 15.58 on Tuesday. Over the same period, Walmart’s stock price rose 40% to reach $74, after remaining virtually flat, around $50, for a decade.

Over the decade that Walmart’s stock barely moved, its book value per share grew at an annual rate of 10.8% annually. Last fiscal year, it was $22.12. Therefore, it was trading at slightly more than twice book value. Its more recent stock price places it at more than three times book value.

Microsoft (NASDAQ:MSFT)

Microsoft has the third-largest market cap. The company has had a similar pattern with its P/E ratio. One year ago it was in the single digits. Then, in the third quarter, it jumped to above 15 and has remained above that number to date. Microsoft’s stock price has increased just 15% over the last year, but in the third quarter it had a $0.06 loss per share, dropping its trailing 12-month earnings used to calculate P/E and resulting in a more expensive stock. It is trading for about $31 on Tuesday.

Microsoft has also grown its book value per share at a slow rate of 2.2% annually. It is similarly priced based on book value per share than it was a year ago. One year ago it traded around 3.9 times book value. Today it is around 4 times book value.

The company still generates strong free cash flow, which reached $29 billion in 2012, and has more than $79 billion in cash on its balance sheet.


Apple has the largest market cap of all U.S. companies, at $638 billion and growing. In a single year, its stock has increased almost 75%, topping $700 per share recently.

Apple’s P/E is the same now, around 16, as it was a year ago. But it has fluctuated in the mean time, falling to as low as around 11 early in 2012. Earnings in the last year increased 71.7%.

The company also became less cheap than it was based on price to tangible book. Its price to tangible book was 4.9 last year, and has increased to 5.06 in the latest quarter.


CVS is a smaller large cap, with a market cap of $58 billion, but one that many Gurus purchased in the last year. Its P/E in fall of last year fell as low as around 13. Since then it has risen to 15.1. Over the same period, the stock has risen 31% to $47.50 per share.

On a tangible book value per share basis, the company has become more expensive. Last year, its price to tangible book was 30.89, and in the latest quarter increased to 37.19.

For more large cap stocks to research, try GuruFocus’ All-in-One Screener and screen by market cap.

Rating: 3.5/5 (13 votes)


Invisiblehand - 5 years ago    Report SPAM
Your analysis of MSFT is shallow because it does not explain why it had a loss last quarter and its PE jumped to 15. It is because of a non cash accounting charge of $6.2 billion it took on a acquisition made back in 2007. It does represent a real economic loss in general if MSFT feels the assets are worthless now but it has little to do with this past quarter's or year's business or the stock becoming suddenly more expensive. If you removed the charge the PE is still around 10.

Disclosure: Long MSFT
The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM

Exactly right; and if you back out net cash, the PE is materially lower than that...
Mocheng premium member - 5 years ago

I was about to say the same thing. Forwarded earning still in the single digits, msft will be releasing Windows 8 before the holidays. It's a strong buy with little down risk.

Disclosure: Long MSFT
Jeffandbrenda - 5 years ago    Report SPAM

cvs market cap 60 billion not million

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