Morgan Stanley released a report this week stating that mega cap stocks are at their cheapest levels in 25 years. The mega cap stocks are defined as those having a market capitalization of $100 billion or more. Morgan Stanley reports that:
Historically, the 30 largest stocks by market cap have traded about in-line with the broader market on a valuation basis, but that’s not the case right now. In fact, the stocks are currently trading at 12.7 times, (their cheapest level since the 1980′s) while the overall market is trading at 16.4 times.
You can read that and get more details on the report here.
The Morgan Stanley report emphasizes that the market appears to be underestimating growth and the future potential in many mega cap stocks. The top five mega caps that Morgan Stanley believes are likely to outperform (the most) are Bank of America (BAC), JP Morgan (JPM), Microsoft (MSFT), Apple (AAPL), and Philip Morris International (PM). Here are some of the mega caps stocks that appear to be undervalued, some of which are from the Morgan Stanley top 5 list:
Hewlett Packard (HPQ) shares are trading at $40.87. HPQ is a leading technology company with products ranging from computers to printers. This company has a current market cap of about $90 billion which is slightly below the $100 billion level used by Morgan Stanley to define mega cap, however, it is close enough. The earnings estimates for HPQ are just over $5 per share in 2011 and $5.69 for 2012. HPQ pays a dividend of 32 cents per year, which is equivalent to a .8% yield.
HPQ announced a goal of $7 per share in earnings by 2012. You can read about that here. The market seems to have very low expectations for HPQ, ever since the resignation of CEO Mark Hurd. It may take time for the new CEO and HPQ to regain investor confidence but in the meanwhile, the shares can be bought on the cheap.
Microsoft Corporation (MSFT) shares are trading at $25.29. Earnings estimates are about $2.55 for 2011 and $2.76 for 2012. This gives MSFT shares a P/E ratio of only about 10 times earnings. The dividend is 64 cents per share per year which is a yield of about 2.5%. Microsoft has a huge amount of cash on the balance sheet - around $40 billion.
Microsoft can still innovate and has some exciting new products like the Kinect which allows people to use their bodies to control and play games without a hand held or other controller. Its fortress-like balance sheet, low P/E ratio, and strong dividend makes these shares a low risk way to invest in technology. Microsoft recently agreed to purchase Skype.
Bank of America (BAC) shares are trading at $12.30. Earnings estimates are about $1.33 for 2011 and $1.87 for 2012. This gives BAC shares a P/E ratio of only about 10 times earnings. The dividend is 4 cents per share per year, which is a yield of about .3%. BAC shares have been under pressure recently, but the CEO recently said the bank continues to work through troubled mortgage loans. BAC shares offer rebound potential, a dividend that is likely to grow, and a low P/E ratio. I don't expect big moves in BAC soon, but patient investors are likely to be rewarded for waiting here.
Intel Corporation (INTC) shares are trading at $23.30 Earnings estimates are about $2.04 for 2011 and $2.20 for 2012. This gives INTC shares a P/E ratio of only about 10 times earnings. The dividend is 84 cents per share, which is a yield of about 3.6%. Intel has a huge amount of cash on the balance sheet- about $20 billion. In the long run, these shares offer growth potential, a solid dividend, a fortress-like balance sheet and a low P/E ratio which makes this a low risk way to invest in technology. Intel also just raised the dividend payout.
Merck (MRK) is trading at $36.59. These shares have a 52 week range of $31.04 and $37.68. Earnings estimates for MRK are about $3.69 per share in 2011 and $3.85 for 2012. This puts the P/E ratio at about 10. Book value is stated at $17.64. MRK pays a healthy dividend of $1.52 per share which is equivalent to a yield of 4.7%. Drug stocks have historically done well in times of inflation as they can more easily raise prices. Also, money has been rotating into the healthcare sector.
The data is sourced from Yahoo Finance and Stockcharts.com.