Just because a company's value already is measured in the tens or hundreds of billions of dollars doesn't mean it can't be a great investment. Large-cap stocks probably aren't going to give you the gigantic returns that are possible from small-cap stocks, simply because the numbers are already so big. But there are plenty of large-cap stocks that can handily beat the market in the coming years.
Three of our Motley Fool contributors think Facebook (NASDAQ:FB), International Business Machines (NYSE:IBM), and Hess Corp. (NYSE:HES) have the potential to rack up solid returns for investors. Here's why you should consider investing in these large-cap stocks this month.
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Taking advantage of the biggest "miss" of all time
Nicholas Rossolillo (Facebook): News flash: The stock market is insane. Facebook is a case in point. After running up more than 20% year to date, all of those gains were erased in one day after the social-media giant slightly missed expectations in the second quarter and warned that revenues would decelerate the rest of 2018, while expenses would grow at a faster rate. The subsequent $119 billion drop in market cap was the largest one-day decline ever for a U.S.-listed stock.
What befuddles me is that none of this should have been a surprise. There are, of course, the scandals over misuse of private data that broke earlier in the year -- which were inevitably going to weigh on advertising income as the company invests in new privacy controls and sharing tools. Daily and monthly active users on the company's social networks in North America and Europe -- its two most important markets -- have been slowing down.
In the second quarter, active users were flat in the U.S. and declined slightly in Europe. Total global monthly active users still increased 11% year over year, but that's a much lower rate than what investors have grown accustomed to. Again, no surprise -- a quarter of all human beings alive are already using one of Facebook's services.
Granted, that's a lot of negative news to digest, especially the part about profit margins falling in the year ahead as the company makes important, but costly, investments to improve operations. But here's some perspective: Revenues just grew 42% year over year. Even an expected high single-digit sequential decline in that growth in the next few quarters still yields 20%-plus top-line expansion. And all of that from a massive enterprise that's valued at $510 billion (after the crash) and generated $5.8 billion in operating profit in the last quarter alone.
After the big drop, shares are priced at a trailing price-to-earnings (P/E) ratio of 27 -- a rich valuation, but not unreasonable for a company that's still growing by leaps and bounds. Maybe it's not as great as what was hoped for prior to the second-quarter report, but investor overexuberance needed to be reset. That job is done, and Facebook's stock now looks like a buy to me.
Not like the others
Tim Green (International Business Machines): IBM has been completely left out of the multiyear rally that has pushed tech stocks higher. While the tech-heavy Nasdaq has more than doubled in the past five years, shares of IBM have shed about one-quarter of their value. As other large-cap tech stocks have soared, IBM has been stuck in the doldrums.
This underperformance is exactly the reason why IBM may be your best bet when it comes to large-cap tech stocks. IBM trades for less than 11 times the company's guidance for full-year adjusted earnings, and the stock sports a dividend yield above 4%. IBM is trading at a steep discount to the market despite a century-long track record and significant competitive advantages. The company is entrenched in industries like banking and has long-standing relationships that allow it to win massive multiyear, cross-technology deals. Revenue growth may be sluggish, but IBM isn't going anywhere.
IBM's growth businesses are now approaching half of the company's total revenue. The cloud business generated $18.5 billion of sales over the past year, and cloud delivered as a service is on an $11.1 billion annual run rate. Even the mainframe, which IBM has been selling for more than 50 years, is having the best product cycle in recent memory. The company's heavy focus on security and encryption is paying off.
It can be hard to buy a stock that has done so poorly for so long. But remember that you're investing in a company, not a ticker symbol. While IBM, the stock, is struggling, IBM the company has turned the corner. The growth businesses are now large enough to offset slumping legacy sales, and margins are beginning to improve as the newer businesses scale.
There's no telling when IBM stock will recover. But I have little doubt that buying at today's prices will work out well for long-term investors.
Big changes offer upside at this oil company
Todd Campbell (Hess Corp.): Hess has restructured its business to focus on high-growth oil-production projects, and this should begin paying off meaningfully in the next two years. That could make this a perfect time to buy Hess Corp's stock.
Recently, Hess has been selling off assets that were generating stable oil production and cash flow, but little in the way of growth. These sales have given it significant financial flexibility that's allowing it to buy back shares, reduce debt, and invest in projects where production growth could accelerate significantly.
In the first two quarters of 2018, Hess repurchased $1 billion of its stock and paid back $500 million in debt. It also recently added a fifth rig to boost production in the prolific Bakken shale and plans to add a sixth rig there in the fourth quarter. As a result, Hess' full-year average production in the Bakken should be between 115,000 and 120,000 barrels of oil equivalent per day (BOE/D), up from 110,000 BOE/D in 2017.
The company's restructuring makes it an intriguing buy, but what really has me excited about Hess is the potential for profit from its joint venture with ExxonMobil offshore Guyana. Hess has a 30% interest in the 6.6 million-acre Stabroek block in Guyana, and phase 1 of that project is expected to produce 120,000 barrels per day (BPD) by early 2020. In 2025, Guyana production could be as high as 750,000 BPD.
Because Hess is investing in high-growth opportunities, its share count is shrinking because of buybacks. Its balance sheet should improve because, as revenue grows, buying its shares now seems wise.
Nicholas Rossolillo owns shares of Facebook. Timothy Green owns shares of IBM. Todd Campbell owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.
