I’m a small-stock devotee . But I know some people prefer to pick their stocks from among the behemoths.
Therefore, about once a year I publish my opinion on the 20 largest U.S. stocks. In 11 previous columns, the supersized stocks I recommended have averaged a 12.6% return over the next 12 months. The ones on which I’m neutral have averaged 11.3%. My “avoids” have returned 7.9%. All figures are total returns including dividends. Here’s my current view on these king-sized equities.
Apple Inc. (AAPL, $647 billion market value), Buy. Betting on the biggest stock in the market is usually a bad tactic. But Apple’s products are so good and its balance sheet is so strong that when the stock weakened recently I snatched it up for clients.
Microsoft Corp. (MSFT, $348 billion), Avoid. I’ve recommended Microsoft in the past, and still own it for some clients. But I wouldn’t take a new position at the current valuation of 29 times earnings.
Exxon Mobil Corp. (XOM, $303 billion), Buy on a time-delay plan. I don’t think we’ve seen a selling climax in the oil markets yet, so I would take one-fourth of a full position now and quadruple your stake when you think oil prices have bottomed.
Wells Fargo & Co. (WFC, $262 billion), Buy. At 12 times earnings I find this bank attractive. I like its strategy of focusing on mortgages and student loans, two areas some lenders have fled.
Johnson & Johnson (JNJ, $259 billion), Buy. I’ve always liked J&J’s business model, with many profit centers operating independently. J&J has earned a 17% return on stockholders’ equity or better every year for at least the past decade and a half. I own it for some clients.
Amazon.com Inc. (AMZN, $253 billion), Avoid. Amazon has been innovative and relentlessly expansive but has posted a loss in two of the past three years. Investors’ outlook is rosy so the stock sells for 112 times estimated 2016 earnings. Count me out.
General Electric Co. (GE, $150 billion), Avoid. I like CEO Jeffrey Immelt’s strategy of re-emphasizing GE’s industrial prowess and transitioning out of the financial industry. However, I would give this plan another year to bear fruit before investing.
JPMorgan Chase & Co. (JPM, $225 billion), Buy. CEO Jamie Dimon looks less like a miracle man than he once did, but I still view him as a capable chief executive. The stock is cheap at just over book value. I own these shares for some clients.
Google Inc. (GOOG, $216 billion), Avoid. Google is an outstanding company, but its profitability has declined in recent years from fantastic to merely good. The present price of $629 a share seems fair to slightly optimistic.
Facebook (FB, $213 billion), Avoid. I would consider selling Facebook shares short, betting on a decline. Book value is around $13, while the stock sells for $94. The flagship website is popular but in my opinion poorly organized, making it vulnerable to new competitors.
Walmart Stores Inc. (WMT, $203 billion), Neutral. Valuations on the stock are attractive, but in an improving economy, some customers will desert the store and move a notch or two upscale.
Pfizer Inc. (PFE, $202 billion), Buy. Drug stocks are unpopular – a good thing, in my book. I like Pfizer’s reach into every corner of the globe. And the dividend yield of more than 3% is pleasant. I own it for a few clients.
AT&T Inc. (T, $200 billion), Neutral. I sometimes own AT&T for income-oriented clients because the dividend yield is alluring at more than 5%. But I wouldn’t put new money into it at this time. Debt has climbed to 131% of equity, the highest in at least 15 years.
Procter & Gamble Co. (PG, $190 billion), Avoid. I believe investors overpay for presumptively steady earnings, like those of Procter & Gamble. Why else would they pay 29 times earnings for a stock with single-digit growth in sales and earnings?
Verizon Communications Inc. (VZ, $181 billion), Avoid. Verizon’s debt is approaching 10 times stockholders’ equity. In my view that’s reason enough to avoid the stock.
Walt Disney Co. (DIS, $173 billion), Neutral. Disney’s fortunes have been on the rise lately, but I think it’s fairly priced at 21 times earnigs.
Coca-Cola Co. (KO, $170 billion), Avoid. Coke used to have a strong balance sheet but now debt is156% of equity. Earnings have been mostly on the decline the past five years.
Bank of America Corp. (BAC, $163 billion), Avoid. I just don’t see any signs of a durable or strong turnaround here.
Berkshire Hathaway Inc. (BRK.B, $161 billion), Buy. The sword of Damocles hanging over this stock is the potential death or disability of uber-CEO Warren Buffett (Trades, Portfolio), 85. He has put together an outstanding collection of businesses, which I believe will do well after his genius is only a memory.
Gilead Sciences Inc. (GILD, $159 billion), Buy. This is probably my favorite of the 20, and I own it for almost all of my clients. The company has a diverse portfolio of drugs on the market and a promising pipeline. Revenue has grown at a 42% clip the past three years, earnings even faster.
John Dorfman is chairman of Dorfman Value Investments in Boston and a syndicated columnist. He can be reached at [email protected]. His firm or clients may own or trade securities mentioned in this column. This column contains general advice, which should be adapted to an investor’s own situation, preferably with the help of a trusted adviser.
