Five Mega Cap Picks for May: Oil is the Name of the Game

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Includes: COP, CVX, MMM, UNH, XOM
by: James Cullen

As we update our quantitative ranking screen of stocks for the month of May, we are going to break our results down further to include various categories of stocks, with the goal being to find high-quality companies trading at reasonable prices. For now, we will focus on mega-caps, which we define as any company with a market capitalization in excess of $50 billion. By our count, there are 115 companies currently meeting that criteria. The top 5 given by the model are:

1. Exxon Mobil (NYSE:XOM). The integrated oil giant is the most profitable and largest capitalized company in the financial markets today, and it still trades for under 13x Free Cash Flow while maintaining EBITDA margins in excess of 23%. In nearly every measure of efficiency and profitability, ExxonMobil holds the top spot in the industry, with the best margins and returns on capital by far.

XOM 1-yr chart

XOM 1-yr chart

2. Chevron (NYSE:CVX). Another major integrated oil company, CVX trades for 7x Operating Cash Flow and 16x Free Cash Flow despite having a 26% return on equity.

CVX 1-yr chart

CVX 1-yr chart

3. ConocoPhillips (NYSE:COP). Warren Buffett’s holding lags slightly behind XOM in EBITDA margins and doesn’t generate the same free cash flow, but looks much cheaper from an Operating Cash Flow perspective at just over 6x OCF.

COP 1-yr chart

COP 1-yr chart

4. 3M Company (NYSE:MMM). Diversified products company 3M offers giant returns on equity (38%) and EBITDA margins (28%), and although the shares look a bit expensive at 22x free cash flow after smashing earnings estimates last week, we think MMM could go higher very easily.

MMM 1-yr chart

MMM 1-yr chart

5. UnitedHealth Group (NYSE:UNH). The largest publicly traded health care provider trades for just 11x free cash flow while delivering sizable returns on equity (21%); forecasts call for mid-double-digit earnings growth over the next several years.

UNH 1-yr chart

UNH 1-yr chart

As the prevalence of oil companies on this short list indicates, the industry trades at a discount to the rest of the market. Although the sheer size of many of the major oil companies certainly adds to their positioning here, there is a noticeable gap between XOM, CVX, and COP and other mega-caps in terms of overall rank as well. If you believe that the current high oil prices are here to stay, oil stocks still appear to have many believers they can win over - sending prices higher in the process.

Disclosure: none