Overall, as an investor, I generally like to take on a good amount of risk, which at times can come with a lot of tough lessons, but also high rewards. What is important is learning from those lessons and ensuring to use some of the basic fundamentals of investing, in particular, diversification and learning to take information from all sides, negative and positive. Most investors that are invested in a particular stock, it is all too easy to fall victim to becoming overly biased towards that company and brushing off information that may be very important because it does not suit one's belief about that particular company.
Based on the statement above, yes, I have been burned and done all of those ridiculous things you tell others not to do. Usually, not always, larger cap stocks can highly reduce that risk in getting hit too hard on a mistake. While I am more of a risk investor, I always look at all options, especially particular large-cap stocks because of the value they add, what they do for investors, transparency, consistency, and lack of downside. This isn't to say you cannot lose significantly on a large cap stock because you definitely can, Netflix (NFLX) is a perfect example. That is a stock after a certain point I never would have invested in because of the upside ran so much already before the big drop, it became overvalued, and it had a lack of overall history.
This is one thing that a poor market creates, great buying opportunities. I am going to discuss 4 stocks that I perceive to have safety, good upside, and a low downside risk. Unfortunately, although it would be great, I obviously cannot guarantee what these stocks will do, but they are at a point where they appear to be very attractive investments, while providing good safety. Here are few things I look for when investing in larger cap stocks, whether for a trade and for the long-term, but they do not necessarily have to meet all of the criteria due to how undervalued one may be.
- Dividends - you get paid while you wait and makes it much easier to accumulate on downturns and hold for the longer term. I also believe it shows a strong dedication to shareholders
- Growing Revenues - Obviously, the more growth the better, but it also depends on where the stock is trading as well
- Growing Net Income - shows the value and overall growth as sales need to make money to mean something
- Well off 52-week + highs - Of course, there will be companies that continue to run, but that in my opinion, usually increases the downside risk
- Closer to 52-week + lows - If there has not been any drastic event for the negativity or decline, then this is a good indicator for getting in, instead of chasing and risking downside.
- One of the top companies in the industry - This is one of the main things in terms of the stock being safer, but it also depends on the industry
- Long Company History and Success
- Low P/E - Just one of the indicators to help show if a company is undervalued and is a great compliment to the other attributes listed
1) Apple (AAPL):
This continues to be my favorite large cap stock, by a long shot. It is basically like a fast growing small-cap in the body of a mega company, in fact, one of the largest companies in terms of it's market cap. I think that is one of the issues with the stock. It dominates year after year after year after year and while it did get a ton of respect, the last 12 plus months have been completely disrespectful to the stock, even though it is up. I think, in a way, in investor's eyes, it is too good and maybe they think they will falter, the growth will slow significantly, there will be no more surprises, there will be no way that they can continue to be as innovative, there is no way without Steve Jobs creativity and leadership they cannot succeed. They have been almost perfect over the last decade in terms of the stock and the company, so every little thing gets scrutinized and every quarter investor's expect that it will not be as good as thought. Analysts could not figure it out, quarter after quarter even while raising their estimates for the year and Apple beat estimates for something like 35 straight quarters or at least near that. Now, they are a little bit more predictable, as that streak ended last quarter. Are the analysts just doing better research, more info available, or do they just know that they have to raise their estimates to even come close to actuality?
I did not realize until this last quarter of Apple that estimates are way too overvalued and in this case incredible earnings did not get what they deserved and all of the talk was how they missed estimates. Which in my opinion is bogus, but helped create an opportunity. Just take a quick look at the 2011 10-K.
- 2011 - $28.27 billion
- 2010 - $20.34 billion
That is a revenue increase of nearly 40%
Net Income Q4:
- 2011 - $6.62 billion
- 2010 - $4.31 billion
That is a net income increase of nearly 54%
Lets also not forget the $80 billion in cash they have too. So, tell me why estimates even matter in this case? Looking forward, it is more than possible that the 2012 EPS may be $40 per share. The growth is not going to all of sudden stop and that would put AAPL at a forward P/E less than 10. On 2013 earnings? We are probably going to be looking at an EPS near $50.
At one point AAPL was near $426 per share, up over 30%, but it has been extremely inconsistent and is now at $363 per share, which is still too cheap. Does it really make any sense? While I understand mentality definitely plays a huge part, regardless of fundamentals at times, but I cannot see it being held down much longer. I also understand that a company this large cannot growth 50% plus every year either, but it is hard to see it significantly slowing in the next few years as they still have a lot of market to take worldwide. I think it is a great buy here and see no problems buying over $400 either. Obviously, to accumulate, the less the share price the better for those getting in or adding, but this is an excellent entry here.
2) Microsoft (MSFT)
I like Microsoft very much overall as they are a technology giant with no signs of deterioration. They are consistent and they have a long history and it seems that over the last decade, the pps has not been treated too fairly. Besides the decline in 2009, it is trading near its low over the last 10 years and near the 52-week low, off about 20% from the 52-week high.
They have an excellent history and the stock experienced some extreme highs in the late 90's and early 2000's, but since, the stock has pretty much deteriorated while the company continues to grow. Since late 2002, the stock price is pretty much the same now as then, even though revenue has increased from $25.23 billion ending June 30th, 2001 to $69.94 billion ending June 30th, 2011, 177%. In that same timeframe, net income increased 214%. Yes, their earnings are not growing at a staggering rate anymore, but over the last 5 years, they have grown net income at an average of about 13% per year. They also have a ton of cash and cash equivalents, roughly $50 billion, which gives them a lot of room to improve, buy other companies, pay shareholders, grow, etc.
One the biggest thing that makes Microsoft a great investment, is the dividend, currently yielding near 3%. Since 2006 they have increased their dividend payout by an average of about 14% per year. Here is a look at the financials from the 2001 10-K, 2006 10-K, and 2011 10-K which will show their growth in sales, dividends, and net income over the last 15 years which shows a continual increase in sales, earnings, cash, and dividend. It trades at a P/E below 10, providing value as well.
3) Vale S.A (VALE)
I have been following this company for the last few years and they continue to impress me, but it does not appear to get a fair value either.
Basically, there are a couple of things that stand out to me. First, the P/E is near 5, which is incredibly undervalued given their position and growth. While their growth is only expected to increase a few percentage points, that does not take away from their achievements and valuation. They do not appear to be in any trouble or losing money. Ending 2011, their revenue is expected to be about $60
billion, which is about an increase of about 33% over 2010. What I like about the future expectations and how it is incredibly undervalued, it leaves a lot of room for an upside surprise over the next couple of years.
8What I also like is that the stock is well off of the 52-week highs by about 43% and about 5% above the 52-week low.
Here is a look at their growth over the last decade. From 2001 to 2010, revenue has increased from $3.94 bill to $45.29 billion, increasing every year: Net income in the same timeframe has shown a similar increase. With FY 2011 expected to be about $60 billion, even since 2007 sales have grown about 90, about 20% per year. They also pay a dividend.
4) Corning (GLW)
This is another company that I have recently been watching. Currently the pps is at about $14, up about 15% from the 52-week low, but it is down from the 52-week high by about 40%.
It is very undervalued as they continue to grow and take advantage of their market, as it is at a P/E of about 7 and full year 2011 results appear to be a big growth year. Their earnings over the last 15 years has been up and down and slow overall. At the same time, minus 2009 and including estimates for FY 2011, they have increased earnings each year since 2003. Again, like the others, this is a steady company, that appears to being growing while not in much danger of losing money, and is incredibly undervalued.
Financials from 1998 to 2010:
Another bonus of owning the stock is that they currently pay a dividend that yields about 2.5%. This is a stock that appears to be good to add on any dips like the current one. It is basically trading right near where it was in April 2005, over 6 years ago. Since then, the company is in much better shape.
While there are a ton of quality companies, and some others that may be considered safe, I feel these four, meet many positive qualities to be able to make a quality return. They are all very undervalued, have quality financials, cash, and besides AAPL, they pay a dividend. They are also off of their highs by a decent amount. While there is no guarantee what will happen with these stocks in the near future as the stock market overall is unpredictable at the moment, they appear to be at the right point to at least start a position with some good upside ahead. Visa(V) is a perfect example of a quality large cap that does not meet the criteria because it is not really undervalued and is significantly up from the 52-week low, about 40%, so the opportunity is much lower with this stock at the moment, but same as above, if it gets beaten down, it is one to consider at that time just not now. The stock market keeps getting kicked around, but it provides ample opportunity for those watching the right stocks. Even if the market does start to tumble downwards at some point, it would provide an even better opportunity for the long-term. What is important about these, is the safety they provide, they are one the top companies in the industry, along with the nice upside.