Forget Bonds And Gold: There's Safety In Mega Caps

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Includes: AAPL, CVX, KO, MGC, MSFT, VB, VTI, WMT
by: John P. Reese

Over the past few years, a number of macroeconomic events -- ranging from the 2008 financial crisis to the Arab Spring uprisings in the Middle East to Europe's debt problems -- have led investors to load up on assets that offer (or at least are perceived to offer) safety. Since the start of 2009, gold prices have just about doubled, and since mid-2009, yields on 10-year Treasury bond have been just about cut in half.

But what's interesting is that many of the stocks that should be considered safest -- big, high-quality blue chips -- haven't been getting much love from investors. Over the past three years, the Vanguard Mega Cap 300 Index ETF (NYSEARCA:MGC) is up about 59%; the Vanguard Total Stock Market ETF (NYSEARCA:VTI), meanwhile, is up about 68%, and the Vanguard Small Cap ETF (NYSEARCA:VB) is up more than 100%, according to Morningstar data (through Feb. 6). So, a dichotomy has emerged: It seems that many investors have been running away from stocks, looking for supposedly safer investments, while those who have been buying stocks have been leaning fairly strongly toward more aggressive shares.

That's created a number of bargains among some of the market's biggest, steadiest companies. In fact, of the 45 stocks in my database that have market capitalizations of at least $100 billion, two-thirds get strong interest from at least one of my Guru Strategies, each of which is based on the approach of a different investing great. Many of these companies have lengthy histories of increasing earnings and sales through good times and bad, solid balance sheets, cheap shares, and stellar dividend yields. And, many provide the types of products and services -- such as food or household consumer staples -- that people buy even when the economy struggles. To top it all off, many have been making more and more inroads in some of the fastest-growing emerging markets in the world, tapping into hot growth spots at a time when the U.S. and other developed markets have been struggling.

Here's a look at a handful of mega-caps that my strategies are high on right now.

Apple Inc. (NASDAQ:AAPL): I track thousands of stocks in my database, and this tech giant is currently the largest one out there in terms of market cap ($460 billion). Its growth has been remarkable over the past decade, part of why my Martin Zweig-based model gives the stock a perfect 100% score.

The Zweig approach looks for firms whose earnings aren't just growing, but growing at an accelerating rate, and Apple delivers. The firm has grown EPS at a 62.3% rate over the long term (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate); an average rate of 85% in the first three quarters of 2011 (vs. the three year-ago quarters); and an even-better 115.9% rate in the last quarter of 2011 (vs. the year-ago quarter). Its earnings growth is supported by strong sales growth, which Zweig liked to see -- long-term revenue growth is 42.6%, and it accelerated to more than 70% last quarter.

While Zweig is a growth investor, he does also look at value. He has written that he avoids growth stocks that have P/E ratios that are more than three times the market average (currently 16.0), or whose P/Es are greater than 43 (regardless of the market average). Apple's P/E is actually below the market average, at 14.0, a remarkable number given its growth.

One more reason the Zweig-based model likes Apple: The firm has no long-term debt.

Chevron Corporation (NYSE:CVX): One of the world's largest oil and gas companies ($212 billion market cap), this California-based titan is also involved in the lubricant, petrochemical products, geothermal energy, and biofuels arenas. Over the past twelve months it has raked in over a quarter-trillion dollars in sales.

Chevron gets strong interest from my Peter Lynch-based strategy. The approach considers it a "slow-grower" because of its single-digit (9.2%) long-term EPS growth, the type of stock that is attractive in large part for its dividend. Chevron has a 3.1% dividend yield, which is nearly 30% higher than the market average, a good sign. Lynch famously used the P/E-to-Growth ratio to find bargain stocks, adjusting the "growth" portion of the equation for yield in the case of larger dividend payers. When we divide Chevron's P/E of 7.9 by the total of its EPS growth and dividend yield, we get a yield-adjusted P/E/G of just 0.65, well below this model's 1.0 upper limit. Chevron is also conservatively financed, with a debt/equity ratio below 10%.

The Coca-Cola Company (NYSE:KO): Coca-Cola's global reach and name recognition give it an incredible competitive advantage over its peers. And that's part of the reason it gets high marks from the model I base on the approach of Warren Buffett, whose Berkshire Hathaway is a longtime Coca-Cola shareholder.

Coca-Cola has a market cap of $155 billion and has taken in about $46 billion in sales in the past year. My Buffett-based model likes its persistent growth -- the firm's EPS have dipped in only two years of the past decade, and it sees the firm's 2011 earnings dip as a buying opportunity, not a sign of a long-term problem. It also likes the company's manageable debt -- with $8.5 billion in annual earnings and $13.7 billion in debt, it could pay off that debt in less than two years if it so chose, which the model considers exceptional. And it likes that Coca-Cola has averaged a return on equity of 30% over the past decade, doubling the model's 15% target. That's a sign of the durable competitive advantage Buffett is known to cherish.

Wal-Mart Stores Inc. (NYSE:WMT): Arkansas-based Wal-Mart has nearly 10,000 stores across more than two dozen countries, and a market cap of $212 billion. While it's enormous, my James O'Shaughnessy-based model actually sees it as a growth play. When looking for growth stocks, the approach targets firms that have upped EPS in each year of the past five-year period, which Wal-Mart has done. It also looks for a key combination of variables: a high relative strength, which means the market is embracing the stock, and a low price/sales ratio, which means its shares remain cheap. Wal-Mart's 12-month RS is a solid 72, and its P/S ratio is 0.48, well below the model's 1.5 upper limit.

Microsoft Corporation (NASDAQ:MSFT): Who says you have to choose between Macs and PCs? My strategies think there's plenty of room for both Apple and Microsoft in a portfolio. My Lynch-based model is high on Microsoft ($258 billion market cap). It considers the firm a "stalwart" -- the type of big, steady firm that tends to do well in downturns or recessions -- because of its moderate 15.9% long-term EPS growth rate and high ($72 billion) annual sales. The strategy likes Microsoft's 11.1 P/E ratio, 0.60 yield-adjusted P/E/G, and very reasonable 18.6% debt/equity ratio.

Disclosure: I am long AAPL, CVX, KO, WMT.