I was thinking about recommending some mega-cap stocks for InvestorPlace readers. However, I wasn’t sure what screening criteria I should use other than the qualifier that they had to have a market capitalization of at least $200 billion, the traditional definition for this size of company.
So, to get some ideas, I looked through ETFDatabase’s list of 14 exchange-traded funds investing in mega-cap stocks. Interestingly, it defined mega-cap as $100 billion or higher, half the traditional definition.
No matter. We’ll get there.
It probably makes sense to limit my focus by checking ETFs with fewer holdings in their portfolio. At first, that drew me to the iShares S&P 100 ETF (NYSEARCA:OEF), a collection of 100 mega-cap U.S. stocks. But then I went even smaller, opting for the Invesco S&P 500 Top 50 ETF (NYSEARCA:XLG), a collection of 50 of the largest companies in the S&P 500.
These will definitely be mega-cap stocks. After all, the average market cap of the XLG is $549 billion, more than two-and-a-half times the minimum size.
There are nine sectors with at least one holding. Two sectors: Utilities and Industrials only have one holding each. However, both are attractive, so I’ll include them in my nine mega-cap stocks to buy.
- Chevron (NYSE:CVX)
- Nike (NYSE:NKE)
- Netflix (NASDAQ:NFLX)
- Costco (NASDAQ:COST)
- United Pacific (NYSE:UNP)
- Apple (NASDAQ:AAPL)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- NextEra Energy (NYSE:NEE)
- UnitedHealth Group (NYSE:UNH)
These nine mega-cap stocks offer hefty opportunities.
Mega-Cap Stocks to Buy: Energy, Chevron (CVX)
The only two energy mega-cap stocks in the XLG are Chevron and Exxon Mobil (NYSE:XOM). While I’m not too fond of the fossil fuel business, 10 times out of 10, I’ll always go with Chevron over Exxon.
As I write this, Chevron’s just reported its Q4 2020 results. They weren’t pretty.
On the top line, revenues were down 30.5% from last year to $25.2 billion. It had an adjusted loss of $11 million on the bottom line, down from an adjusted profit of $2.8 billion a year earlier.
For all of 2020, its revenues fell 35.4% to $94.7 billion, the first time its revenues have fallen below $100 billion since 2002. As for losses, it had an adjusted loss of $368 million in 2020. That compares to an $11.9 billion profit in 2019.
And now the good stuff.
In August 2020, Chevron announced a partnership with Canadian utility Algonquin Power and Utilities (NYSE:AQN) to co-develop renewable power projects that will deliver electricity to Chevron’s U.S. operations and elsewhere.
“Chevron intends to lead in the future of energy by developing affordable, reliable and ever-cleaner energy,” Chevron Pipeline and Power President, Allen Satterwhite, said at the time. “This agreement advances Chevron’s commitment to lower our carbon footprint by investing in renewable power solutions that are reliable, scalable, cost efficient, and directly support our core business.”
Meanwhile, Exxon is planning to increase its carbon emissions as part of its seven-year investment plan. Exxon continues to fall behind its peers in the energy industry, including Chevron.
Chevron hasn’t totally embraced renewable energy — it still plans to keep pumping lots of oil in the future — but the fact that it’s at least focusing on offsetting carbon emissions through deals like the Algonquin partnership suggests that it understands it has to do better on the environment front.
With a net debt-to-EBITDA that’s one-third Exxon’s, if you’re going to go big, Chevron’s the better bet.
Consumer Discretionary: Nike (NKE)
After hitting a 52-week high of $147.95 in mid-January, Nike’s stock has fallen back a little. As I write this, it has a year-to-date total return of -4.07% through Feb. 2. Given Nike’s 10-year annualized total return is 21.4% and it was the top-performing Dow Jones Industrial Index stock in 2020, now might be a good time to buy some.
There’s no question Nike stock had a strong performance in 2020. A lot of that had to do with its transformation of its business model to more direct-to-consumer business and less wholesale in a move to better engage with the end consumer.
In March 2020, I said that Nike’s business wasn’t going to recover from Covid-19 in the near term, made NKE stock an attractive buy.
“I believe Nike remains a good stock to own for the long term. Any weakness from earnings and guidance should provide a buying opportunity,” I said at the time.
“However, as we are learning, this is not a static situation. It’s changing rapidly, in ways that are bad (Italy) and good (China), making it really hard for investors to take the plunge. That’s understandable.”
Just days before reporting its Q3 2020 earnings, I concluded as follows:
“With Nike stock down more than 35% in 2020, I would consider implementing a dollar-cost averaging program for buying NKE stock. Every week it’s down by more than 2-3%, buy 10-20 shares. If you use a commission-free broker, you ought to be fine.”
I got lucky. That was basically the bottom of the March correction. You could have bought a mega-cap ETF and also done pretty well.
However, I continue to believe that Nike remains an excellent stock to own for the long haul. Buying this stock on the dips will make you money because it doesn’t dip that often.
Fintech Zoom does these recurring articles that tell readers how much you would have made if you bought a stock five years ago and held it to the present. In Netflix’s case, a $1,000 investment five years ago would have been worth $4,786 on Jan. 20.
In case you’re wondering, that’s compounded annual growth of 36.8%, or approximately three times the return of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
In fact, if you go back to August 2017, when Disney ended its distribution deal with Netflix so it could start its own streaming service, you’ll find that Netflix managed to kick Disney to the curb over the next 42 months.
“This acquisition [BAMTech] and the launch of our direct-to-consumer services mark an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands,” Then Disney CEO Bob Iger said in an Aug. 8, 2017, statement.
Between that statement and their Jan. 28 closing prices, Netflix delivered a 199% return compared to 60% for Disney. A three-fold beatdown.
Although I’m very bullish about Netflix, I only got to write about the video streaming service on two occasions last year. The time was in October when I suggested $540 wasn’t a bad entry point if you were prepared to hold for 2-3 years.
Nothing’s changed to alter my opinion. It’s an excellent long-term buy.
Out of the six consumer staples stocks in the XLG, I easily could make an argument for at least two others, including Procter & Gamble (NYSE:PG) and PepsiCo (NASDAQ:PEP).
However, having spent a fair amount of time at my local Costco during the pandemic, it’s clear that it’s become an essential service whether local governments want to call it that or not.
“Whenever subscription-based fees go up, the business media routinely questions what the overall effect will be for the members who pay those fees. It’s only human nature. And the same applies for investors,” I wrote on April 27, 2016.
For those who don’t remember, Costco raised its annual memberships by 10%. The previous increase in 2011 saw regular Gold Star memberships go from $50 to $55 and the Gold Star Executive membership increased from $100 to $110.
Where are we today? The 2016 increase was the last price change. The basic membership is $60, while the executive membership is $120. In normal times, I’d expect a fee increase in 2021. However, with Covid-19 still around, I’m doubtful. I guess we’ll see.
What I do know is that Costco’s stock price after membership increases tends to go up. In 2012, it gained 18.5%. In 2017, it gained 16.3%.
Remember, the membership fees act as Costco’s profits to pass on any savings from suppliers to the customers.
It’s a winning formula.
United Pacific (UNP)
For those brave souls who bought Union Pacific stock at its 52-week low of $105.08 during 2020’s March correction, you are to be commended. You’ve almost doubled your money in less than a year.
While I wouldn’t hold it against you if you decided to take profits once you passed the one-year short-term capital gains restriction in mid-March, I could see the railroad continue to perform in 2021.
Union Pacific reported Q4 2020 results on Jan. 21. The railroad delivered volume, productivity, and pricing growth in the quarter that led to $1.6 billion in adjusted net income, 14.3% higher than a year earlier. It also reported a record operating ratio of 55.6%, 410 basis points higher than Q4 2019.
While full-year earnings were down slightly, Union Pacific is very confident looking out to the rest of 2021.
“We are confident in our ability to execute on the opportunities ahead. Importantly, our outlook for the year includes the potential for improvement across all three performance drivers, volume, price and productivity,” Chief Financial Officer Jennifer Hamann stated in the Q4 2020 conference call.
“With volume, we’re looking for full year growth in the 4% to 6% range largely driven by year-over-year increases in the second quarter.”
Although I’ve already got a railroad in my nine selections (Berkshire Hathaway and Burlington Northern Santa Fe), Union Pacific is a pure-play. Should the economy improve, its stock will get more of a positive jolt than Berkshire will.
Apple delivered a cautious outlook when it reported its first-quarter results on Jan. 27. No specific numbers were given. However, it did say that sales for AirPods and the rest of its wearables line will see a deceleration of growth in future quarters. Perhaps, even more worrisome is the warning that its Services business will have a tough time beating last year’s excellent comparables.
While Tim Cook’s paid to be concerned about potential weaknesses in its business, I don’t think there’s any way investors can look at its latest quarterly numbers except to be in awe.
Sales were $111.4 billion for the period ended Dec. 26, 2020, 21% higher than a year earlier and $8.3 billion higher than analyst expectations. More importantly, it was Apple’s first-quarter over $100 billion in sales. On the bottom line, it earned $1.68 a share, also higher than the consensus.
“It was an extremely strong quarter. What’s likely weighing on the stock at the moment is that they didn’t give guidance,” said Shannon Cross of Cross Research.
Cautious outlook aside, I don’t think any mega-cap stocks on the planet can match Apple’s firepower. It’s a definite winner in the mega-cap category.
Financials: Berkshire Hathaway (BRK.A, BRK.B)
No one would be more disappointed by the holding company’s performance in 2020 — up 2%, 16 percentage points less than the S&P 500 — than Warren Buffett himself. Just weeks from the Oracle of Omaha releasing his much-anticipated letter to shareholders, we’ll find out what kept him up at night the past year.
It definitely wasn’t Apple.
Berkshire received $773 million in dividends from Apple’s 250.9 million shares of Apple in 2019. The difference between cost and market value of Apple’s shares at the end of 2019 was $38.4 billion in unrealized gains. In 2020, Buffett did sell some Apple shares. That said, as I write this, the company’s 964.7 million shares are worth $132.3 billion or 49% of Berkshire’s $271 billion equity portfolio.
If ever there was an argument for focused portfolios, this would be it. Buffett could sell a third of its stocks and not lose any momentum.
The problem — a good one to have, in my opinion — is that it already has a ton of cash on its balance sheet. I suspect we’ll see some decisive moves in 2021 to remedy that investor concern.
Utilities: NextEra Energy (NEE)
In January 2019, I recommended the utility as a good stock to buy because of its push into green energy.
“The company’s Energy Resources division generates 20 gigawatts of energy, 80% of it from wind and solar power, with the remainder from nuclear and natural gas,” I wrote on Jan. 22, 2019.
“If you’re a socially responsible investor, this alone should make NextEra an attractive investment in 2019. But if you’re purely interested in shareholder returns, NEE delivers there, too.”
Nothing’s changed at NextEra in the 24 months since. In fact, NextEra’s only accelerated its renewable energy push, which has led to excellent business results.
Heading into 2021, the company expects to deliver earnings per share this year between $2.40 and $2.54, up 7% from the $2.47 midpoint. That’s in line with its plan to grow earnings by 6-8% annually through the end of 2023.
On the renewable energy front, it has a backlog of 13.5 gigawatts (GW). Further, it expects to build as much as 30 GW capacity over the next four years, increasing its green energy output dramatically.
I continue to believe it is one of North America’s best-run utilities.
Healthcare: UnitedHealth Group (UNH)
The provider of health insurance reported its fourth-quarter results on Jan. 20. They were excellent.
On the top line, analysts expected UnitedHealth’s revenue to increase 7% year-over-year to $65.24 billion. They actually increased by 7.5% to $65.47 billion on a strong showing from its Optum health services division.
It earned $2.52 a share on the bottom line, 35% lower than a year earlier but 5.4% higher than the consensus estimate of $2.39 a share. For all of 2021, it expects to generate between $17.75 and $18.25 a share, which includes a $1.80 deduction for Covid-19 costs.
The biggest threat to its stock moving higher in 2021 is the uncertainty surrounding the Biden administration’s healthcare reform plans.
In 2020, UNH had a return on equity of 24.9%. Not quite as high as its 25.3% ROE in 2019, it’s still higher than its five-year average of 23.1%.
As healthcare mega-cap stocks go, UNH is one of the best regardless of your politics.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Fintech Zoom Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.