Sunday, September 16

Week 63 - Bigger is often better

Situation: Large companies have advantages over smaller companies, advantages that can make the risk of bankruptcy negligible. These include multiple subsidiaries and penetration of international markets, which means some part of the big company is always making money and can support other portions of the business. Most large cap companies have over 100,000 employees, and can also support as many as another 100,000 in the supply chain. This means that very large companies are key players in the broader sense of supporting our economic system. That is why companies other than banks were bailed out by the US Government during the Lehman Panic in 2008-09, namely, GM, Chrysler, GE, AIG, Fannie Mae, and Freddie Mac. The very biggest companies won’t be allowed to go bankrupt. Therefore, the greatest risk to stock ownership (bankruptcy) is not a concern for investors. Fraud and mismanagement, however, do remain as concerns because large multinational companies are unwieldy. Nonetheless, the advantages of stock ownership in large companies outweigh the disadvantages, and everyone who is saving for retirement needs to periodically consider investing in one or more of these companies.

Looking at the Zacks database, we find 21 S&P 500 companies with both a market capitalization of over $120 Billion and a positive Return on Investment (ROI) over the past 5 yrs (Table). We omitted putting two companies, Google (GOOG) and Philip Morris International (PM), in the Table because they didn’t exist in 2002. That is when our calculation for “reward” (10+ yr Annualized Total Return) begins. The other 19 companies are in the Table. The Table also includes the lowest-cost S&P 500 Index fund available (VFIAX) and the only low cost mutual fund (VWINX) that has an asset allocation scheme similar to our Goldilocks Allocation (see Week 3). A variety of metrics are included in the Table for your reading pleasure. Red flags mean “buyer beware.”

Bottom Line: The largest companies tend to survive downturns better than their smaller brethren, so we’ve grouped those “megacaps” together for closer analysis using our favorite tools and metrics. Only the oil giants, ExxonMobil and Chevron, emerge with no cause for concern. But even those two companies, which are reliable & consistent money-makers, have to be watched closely by their shareholders. For example, one might question how management is preparing for the wider adoption of carbon-neutral legislation designed to save the planet from global warming.

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