As the name implies, investing in large-cap stocks means owning a stake in companies that have already amassed big valuations -- typically above $10 billion. The larger a business gets in terms of sales and earnings, the more difficult delivering increasing levels of relative growth becomes, but a company having a big market capitalization isn't an indication that its stock can't be a winner for your portfolio.
We asked three Motley Fool contributors each to spotlight a high-quality, large-cap stock that they believe is worth owning for the long haul. Here's why they identified Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-A), Ford Motor Company (NYSE:F), and International Business Machines (NYSE:IBM) as large-cap stocks that are worth buying today.
The sum of the parts adds up to a bargain stock
Tyler Crowe (Berkshire Hathaway): Any stock trading at a price-to-earnings ratio of 16 times is a reasonable valuation. It is certainly below the average valuation of the S&P 500, which stands at 24.7 times. So to see Berkshire Hathaway trading at that multiple today seems like a fair value for a business that has outpaced the S&P 500 over its lifetime. If you dig deeper into Berkshire's portfolio, though, you'll find that the income-generating portions of its business are valued at significantly less than that.
All in all, Berkshire's portfolio of cash, short-term securities, and more liquid investments like stocks and long-term bonds is valued at $318 billion. At the time of this writing, Berkshire Hathaway's market capitalization was $520 billion, meaning that more than 60% of its market capitalization is in cash and stocks. More importantly, however, it means that the rest of the business -- comprised of segments such as insurance underwriting, railroads, manufacturing, retail, and energy, which generated $5.7 billion in operating earnings -- are valued at around $202 billion. That's a P/E ratio of less than 10 for all of its noninvestment operations.
Any way you slice it, the noninvestment part of Berkshire is performing exceptionally well and the market is assigning that portion of the business a very modest valuation. With Buffett's "elephant gun" loaded with close to $100 billion in cash, there are ample opportunities to acquire businesses and grow operating earnings. No wonder Buffet has changed his criteria for buybacks recently, since it looks as though Wall Street is undervaluing Berkshire Hathaway.
This auto major's stock is holding its biggest sale in six years
Rich Smith (Ford Motor Company): This year, I know that I (like a lot of folks) am probably at serious risk of shouting myself hoarse over this, but I think it's undeniable that Ford Motor Company is a large-cap stock that you should buy right now. Perhaps, now more than ever.
The numbers speak for themselves: Ford stock is expected to grow earnings at 15% annually over the next five years, significantly faster than the average 12.3% growth rate projected for the S&P 500. Yet at a valuation of just 5.9 times trailing earnings, the stock sells for barely a quarter of the average 25 times earnings multiple of the S&P 500. (The stock is even cheaper when valued on a free cash flow basis -- costing a mere 4.4 times FCF according to data from S&P Global Market Intelligence).
Granted, Ford stock has been cheap for a long time. But right now it's even less expensive -- down 10% after the company posted declining sales overall, weak sales to China in particular, and a supplier's factory fire that dinged earnings in Q2. The good news is that Ford is already working to fix its problems, and that thanks to these temporary setbacks, its stock is now selling at its lowest price of the last six years. I think it's a great time to buy.
Big Blue is a worthwhile buy
Keith Noonan (IBM): Whether or not concerns that a significant correction is on the horizon for overheated tech stocks prove to be correct, it's probably not a bad idea to look at some more modestly priced offerings in the sector. IBM fits the bill, trading at just 10.5 times this year's expected earnings and offering a 4.3% dividend yield. Those metrics look appealing in light of the company's progress on its turnaround initiative.
IBM's most recent earnings report delivered 5% earnings growth and a 2% currency-adjusted sales expansions over the prior-year period. As-a-service revenue also jumped 24% in the June quarter to comprise roughly 56% of sales -- a favorable indicator as business in this category tends to be stickier. IBM has now delivered currency-adjusted sales growth in two of its last three quarters -- a significant development in light of the fact that it had reported 23 consecutive quarters of year-over-year sales declines prior to the start of calendar 2018.
Recent announcements suggest that the company's customer base is expanding and that its efforts in artificial intelligence and blockchain services are helping to win substantial new contracts for its cloud platform. Big Blue recently signed a five-year deal with the Australian government worth $740 million to provide blockchain-backed accounting services and cloud infrastructure services to information technology company KMD through 2024 worth $320 million. It's also recently expanded deals with health-insurance provider Anthem and Thailand's Bank of Ayudhya and has brought Barclays and Citigroup on for a trial run of a blockchain-backed app store.
With signs that business is picking up, a strong dividend yield and 23-year history of annual payout growth, and a nonprohibitive valuation, IBM is a large-cap stock worth buying today.
Keith Noonan owns shares of IBM. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of Berkshire Hathaway (B shares). The Motley Fool recommends Berkshire Hathaway (B shares) and Ford. The Motley Fool has a disclosure policy.