Should I Invest in These 5 Big-Cap Shares?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment, and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing big-cap investment opportunities and during recent weeks I've looked at Apple  (NASDAQ: AAPL  ) , Wolseley  (LSE: WOS  ) , CRH  (LSE: CRH  ) , ARM Holdings  (LSE: ARM  ) , and Marks & Spencer Group  (LSE: MKS  ) . This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):

Share

Apple

Wolseley

CRH

ARM

M&S

Dividend cover

5

4

5

5

4

Borrowings

5

4

1

5

2

Growth

5

4

2

5

3

Price to earnings

4

4

4

2

3

Outlook

4

4

3

5

2

Total (out of 25)

23

20

15

22

14

This collection of potential big-cap investments looks like a team of two halves, with Apple, Wolseley, and ARM in the leading pack, and CRH and M&S bringing up the rear.

Technology
At first glance, ARM Holdings and Apple seem to have much in common, both operating in the technology sector. Closer inspection reveals some fundamental differences. For example, Apple makes must-have electronic gizmos, and the success of its sales efforts depends on having new products hit the right fashion receptors of its (so far) loyal customers. That's not certain to continue happening, despite past successes, and that realization could be behind recent share-price weakness.

ARM, on the other hand, has positioned itself at the heart of must-have fashion gizmos regardless of which company makes them. The company designs and sells intellectual property that manufactures use to make the processors and other electronic components that drive their gizmos. ARM does it cheaper and better, which has led to mass adoption of its offering. For its trouble, the company earns a license fee each time it sells a design and an ongoing royalty as the end products sell. It's a successful formula that has attracted a lofty valuation. Nevertheless, I'm much more likely to invest in ARM than in Apple.

Distribution
Plumbers and builders tend to be loyal to their suppliers, thanks to the effort and hidden costs involved with changing. Wolseley enjoys a mainstream distribution presence on both sides of the Atlantic and can be a decent vehicle for investors to ride the fortunes of the entire industry. The plumbing and building industries are inherently cyclical, and Wolseley has recently emerged from a stomach-churning lurch downward in both its business and its share price. 

However, a recent focus on cash and profit generation has seen a multibagging share-price recovery. Underlying earnings cover the dividend well, and the company has paid off most of its previous debt. Earnings and cash flow have been growing, and to complete the turnaround story, the valuation appears to understate the company's forward prospects. However, things could change rapidly in the event of another downturn in demand. I have the shares on watch and may pounce on any share-price weakness.

Building materials
CRH earns more than 60% of revenue from supplying diversified building materials such as cement, aggregates, asphalt, and ready-mix concrete. It's a cyclical business, and debt became a problem during 2009, when a drop in trade caused the company to raise money with a dilutive two-for-seven rights issue, which raised funds to pay down debt and fund acquisitions. There's still a lot of debt on the balance sheet, and the company's potential to deliver stock market-beating total returns depends on the macroeconomic cycles that the company's business rides, in my view. CRH doesn't tick enough boxes for me to invest just now, but I'm watching it.

Retailing
Consumers seem to be shifting to non-High-Street shopping, which is challenging the traditional business model of retailers such as Marks & Spencer. On top of that, the company has been coping with the recent economic slowdown. Multichannel revenue accounted for around 6% of overall sales last year, so there's still a lot of work to do if the company is to reshape its business. I think Marks & Spencer's total-return potential is uncertain, so I'm not investing right now.

A share that one of the Fool's top investment writers has uncovered, though, seriously tempts me. He has put his money where his mouth is by investing and believes the share is The "Motley Fool's Top Growth Share for 2013." In this new Fool report, you can discover how the company has re-envisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.


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  • Report this Comment On February 19, 2013, at 11:44 PM, TimKnows wrote:

    You won't have any positive return this year if you buy Apple.

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Related Tickers

11/26/2014 4:00 PM
AAPL $119.00 Up +1.40 +1.19%
Apple CAPS Rating: ****
ARM $906.30 Up +8.30 +0.92%
ARM Holdings CAPS Rating: No stars
CRH $1496.80 Up +17.80 +1.20%
CRH CAPS Rating: No stars
MKS $480.28 Down -0.22 -0.05%
Marks & Spencer Gr… CAPS Rating: No stars
WOS $3532.47 Up +1.47 +0.04%
Wolseley CAPS Rating: No stars

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