Is Biggest Best?

Quick -- can you name the publicly traded companies with the largest market capitalizations? (Here's a quick introduction to market caps, if you're not familiar with the concept -- basically, it's a stock's total price tag, calculated by adding the value of every share of stock.)

Here are the top 12, from a recent screening session at Yahoo!:

Many investors flock to large companies, which are often considered "blue chips," because they sense that those are the most stable. That's not necessarily the best thinking. Other investors steer clear, assuming that giants won't be able to grow quickly. That deserves some rethinking, too.

To put the list above in some perspective, I looked through our Fool archives for some old reports on various companies' market caps. A little more than two years ago, for example, I cited GE as having a market cap of $293 billion. Today, its value is 24% higher -- not bad for a giant, eh? Microsoft, meanwhile, sported a market cap of $283 billion at the time, so it's currently sitting at a level 7% lower. Wal-Mart went from $246 billion to $187 billion, dropping some 24%. Of course, two years is not the best period over which to evaluate companies and draw conclusions -- it's still a rather short span.

About three years ago, Rick Aristotle Munarriz noted that Cisco Systems was, during the market's recent heyday, the top dog of market cap. Today, its market cap is barely above $100 billion, and though that's nothing to sneeze at, it's not even in the top 10.

An article from 1998 listed the top American companies by market cap, and the list is enlightening. General Electric led the field, with $252 billion, followed by Microsoft's $189 billion. ExxonMobil was just at $152 billion, less than half its current value. Merck, at $138 billion back then, is just around $60 billion today, plagued by Vioxx and other troubles. That's a drop of more than 50%! (Read a Dueling Fools special on Merck.)

So what lessons can one draw from all this? Well, a few, I think. Really big companies can get even bigger and can increase in value rather quickly sometimes. And really big companies can also get much smaller in short order. Few companies should be assumed to be stable. That's why it's never smart to look at just one factor (or even a few factors) for any company. To have the best chance of doing well, you need to study a company closely, evaluating its health and prospects from many angles. That's what our stock analysts do for you when they recommend stocks in our newsletters. (See how impressive our newsletters' records are, and then consider trying one or more, for free.)

Another thing to keep in mind is that one advantage of big blue chips is that they often pay decent dividends. So even if their stock slumps temporarily, unless they're in serious trouble, they'll keep rewarding you with dividend payments while you wait for stock price appreciation. ExxonMobil and Johnson & Johnson, for example, sport dividend yields near 2% today, while GE's is around 2.5%. Citigroup's yield is rather high, near 4%, while Pfizer's is around 3%. Bank of America's yield tops 4%. Our Income Investor newsletter is a great resource if you're looking for sizable companies that offer sizable dividends. Try it for free, and you'll be able to peek at a list of all of its recommendations.

Merck is a Motley Fool Income Investor recommendation. Pfizer and Vodafone are Motley Fool Inside Value picks.

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Longtime Fool contributor Selena Maranjian owns shares of Microsoft, Wal-Mart, Johnson & Johnson, and Pfizer. The Motley Fool has a disclosure policy.