From its earliest days of incorporation back in the late 1830s, Chicago has been all about trade. The city cultivated that early trade focus and used it to become one of the most diverse business climates in the United States. If you're considering investing in Chicago stocks -- the publicly traded stocks of the businesses that have their headquarters in the Chicago metro area -- it's important to remember that.

Situated where the Chicago River meets Lake Michigan, Chicago's early trade centered around agriculture and transportation, taking the crops and other farm products produced in the region and sending them around the country and around the world. The economic hub eventually attracted businesses and industries of all kinds looking to take advantage of what the heart of America had to offer. For those who didn't find either U.S. coast conducive to their business efforts, the "Second City" became a natural alternative to set up shop.

Now the third largest city in the United States by population, Chicago has long served as a center of commerce for several Midwestern states, as well as numerous global businesses. Tourists from around the world visit the city looking for food, fun, and culture, while investors come looking for solid prospects for making money from companies big and small.

A view of the Chicago skyline from Lake Michigan.

A view of the Chicago skyline from Lake Michigan. Image source: Getty Images.

When considering making investments in companies based in Chicago, the key is having a strong grasp of the basics. Let's take a look at some essential concepts everyone should know before investing in Chicago stocks:

  • What are Chicago stocks?
  • What are the largest Chicago stocks?
  • Who should be interested in investing in Chicago stocks?
  • How should you evaluate Chicago stocks?
  • What should investors in Chicago stocks be looking for?
  • What are the risks facing Chicago stocks?
  • What companies might come to Chicago?
  • Is now the time to buy Chicago stocks?

What are Chicago stocks?

Chicago's metro area is home to the headquarters of companies that are key players in multiple sectors. Companies with headquarters in the area are "Chicago stocks." Represented industries include auto manufacturing, biotech, business services, energy, fabricated metals, financial tech, food processing, freight, health services, information technology, manufacturing, medical technology, and plastics and chemicals development.

Agriculture was at the heart of Chicago's initial growth, and that can be seen in some of its biggest businesses today. When looking at yearly revenue, Archer Daniels Midland is the largest of several Chicago companies with a direct connection to agriculture. But ADM's diverse operations are really an example of the city as a whole. 

The company's biggest role involves buying and transporting farmed crops from the region, as well as from around the world, and then turning them into a slew of products for both human and animal use. But ADM is also a major energy producer through its heavy involvement in the processing of some of those crops into ethanol. The company also makes a range of chemicals and oils for industrial use, including ingredients that go into personal-care products like soaps and skin creams. It even runs various commodity exchanges and provides crop insurance options for the farm producers it works with.

Robust commerce gave birth to the Chicago Mercantile Exchange, which was established in 1898 (initially to organize trade in butter and eggs) and eventually grew into a clearinghouse for the exchange of numerous commodities. Basically, the exchange offered a way for companies that needed to buy large quantities of wheat, corn, soybeans, various meat products, or hundreds of other tradeable goods an easier way to centralize and organize the purchases and the bidding on the materials coming in from thousands of producers. It also gave the producers (farmers) better access to companies and traders that wanted what they produced and a quick, efficient way to get it to them.

In the 1960s, the exchange added futures trading to its list of services. Traders in commodities, which often have volatile prices, will use futures trading to lock in prices for what they're going to buy and sell, well before the commodity is actually produced to better manage the risk from the volatility. A futures contract provides the farmer with predictable compensation for the crop, and the contract buyer ensures they will get enough materials to create their product at a known price they can build into their accounting.

In 2007, The Mercantile Exchange merged with the Chicago Board of Trade to form CME Group, one of the largest marketplaces for buying and selling shares, options, and futures related to stocks, bonds, and commodities in the world. It's similar to the NYSE and NASDAQ stock exchanges, but specializes in futures of all sorts, and even started trading cryptocurrencies in 2017. On average, CME Group handles about 3 billion contracts worth approximately $1 quadrillion annually (that total is equal to 15 times the gross domestic product (GDP) of the world).

The city's early investment in the growth of the Mercantile Exchange led to Chicago's dominating futures trading and derivatives. With a derivative investment, the investor doesn't own the underlying asset. Instead, he or she is betting on whether its value will go up or down.

The city's derivatives exchange community, which started with commodity futures trading at the Chicago Board of Trade in 1848, established it as a global financial center. Chicago now handles more than half of exchange-based derivatives trading in North America and about 20% of the world's derivatives trading market. That global share is twice as big as New York City's 10% share and about equal to all European exchanges combined.

What are the largest Chicago stocks?

Chicago may have the nickname Second City but it's home to several first-tier companies with international reach. There are different ways to judge the size of a company. Here are the top 10 publicly traded companies by revenue (another word for sales) in their respective fiscal 2018s that call the Chicago metro area home.

Rank/Company/Ticker

Market Cap*

Net Income**

Fiscal 2018 Revenue

1. Walgreens Boots Alliance (NASDAQ:WBA)

$48.5 billion

$5.1 billion

$131.5 billion

2. Boeing (NYSE:BA)

$210.4 billion

$10.4 billion

$101.1 billion

3. Archer Daniels Midland  (NYSE:ADM)

$22.8 billion

$1.7 billion

$64.3 billion

4. Caterpillar (NYSE:CAT)

$76.8 billion

$6.4 billion

$54.7 billion

5. United Airlines (NASDAQ:UAL)

$22.8 billion

$2.3 billion

$41.3 billion

6. Allstate (NYSE:ALL)

$34.0 billion

$1.6 billion

$39.8 billion

7. Exelon (NASDAQ:EXC)

$48.7 billion

$2.3 billion

$35.9 billion

8. Kraft Heinz (NASDAQ:KHC)

$38.2 billion

$2.4 billion

$26.3 billion

9. Mondelez International (NASDAQ:MDLZ)

$79.7 billion

$3.4 billion

$25.9 billion

10. US Foods (NYSE:USFD)

$7.7 billion

$0.4 billion

$24.2 billion

*Market cap as of June 29, 2019. **Sum of the latest four reported quarters. Data sources: Nasdaq.com and Google Finance.

The list changes a bit when you switch to a different metric geared toward stock trading. Here are the top 10 publicly traded companies by market cap (multiplying the number of tradable shares by the share price) that call the Chicago metro area home. 

Rank/Company/Ticker

Fiscal 2018 Revenue

Net income*

Market Cap**

1. Boeing 

$101.1 billion

$10.4 billion

$210.4 billion

2. McDonald's (NYSE:MCD)

$21.0 billion

$5.9 billion

$155.7 billion

3. Abbott Labs (NYSE:ABT)

$30.6 billion

$2.6 billion

$149.4 billion

4. AbbVie (NYSE:ABBV)

$32.8 billion

$5.34 billion

$116.0 billion

5. Mondelez International 

$25.9 billion

$3.4 billion

$79.7 billion

6. Caterpillar 

$54.7 billion

$6.4 billion

$76.8 billion

7. CME Group (NASDAQ: CME)

$4.3 billion

$1.9 billion

$71.0 billion

8. Illinois Tool Works (NYSE:ITW)

$14.7 billion

$2.5 billion

$49.5 billion

9. Exelon 

$35.9 billion

$2.3 billion

$48.7 billion

10. Baxter International (NYSE:BAX)

$10.6 billion

$1.6 billion

$42.0 billion

*Sum of the latest four reported quarters. **Market cap as of June 29, 2019. Data sources: Nasdaq.com and Google Finance.

Who should be interested in investing in Chicago stocks?

Billionaire Warren Buffett has always advocated that investors should stick to areas they know -- their "circle of competence" -- when deciding what companies to invest in. The reason is simple: The more you know about a company, the better your position to judge its prospects.

If the company is nearby, you're more likely to hear whether it's hiring or looking for new office space, for example, perhaps indicating business is doing well. If you use its products or services regularly, you're better able to judge whether it's doing a good job providing a product you like or services you need.

That's not to say you should move to Chicago so you can be a good investor in Chicago stocks. But it is to say that there are a lot of Chicago-based companies that make products you know well and use regularly, wherever you may live.

What are the odds that you or someone you know has visited a McDonald's restaurant in the past month? Did you take a flight somewhere recently? There's a very good chance that it was on a Boeing jet.

Have you used canola oil, cocoa powder, or wheat flour in your cooking? It's likely ADM had a hand in getting that product to your kitchen. Have an infant who gets Similac infant formula or a grandparent who's supplementing their diet with Ensure? Abbott Labs produced it.

Have you dipped an Oreo cookie in some milk as an afternoon snack or had a Ritz cracker with a smear of peanut butter? Mondelez made that possible. These are all Chicago-based companies.

Another basic rule of investing is to diversify. Owning stocks of companies of various types, sizes, and representing different market sectors insulates you better against market downturns, as not all companies go down for the same reasons. Investing in the wide range of Chicago-based stocks allows you to diversify.

If you were to put together a large-cap Chicago portfolio, it wouldn't represent a perfect cross section of the national economy (it's underweighted for tech and energy stocks and overweighted for financial services), but it would come pretty close. Spreading your investment risk is smart investing.

How should you evaluate Chicago stocks?

Evaluating Chicago stocks starts with following the same guidelines one would follow when considering any stock. You should be able to assess the financial position of a company and see what investors think about the stock and its potential by looking at a company's balance sheet and some common metrics like:

  • Trailing price-to-earnings ratio (P/E): This metric analyzes a company's earnings in relation to its share price. The earnings multiple (as it's also called) values a stock to see how cheap or expensive it's trading in relation to the earnings the company has generated over the trailing 12 months. The lower the ratio, the cheaper the stock. The average P/E for companies in the S&P 500 at the time of this writing is about 22. This is one of the most widely used relative valuation metrics and serves as an easy reference point for comparison. (Forward P/E, using estimated earnings, can also be looked at.) 
  • Price-to-earnings-growth ratio (PEG): Investors often buy stocks based on the growth opportunities they see for the company. The PEG ratio measures a company's current earnings in relation to its price but also takes into account a company's growth potential. PEG is calculated by dividing the P/E ratio by the estimated earnings growth rate, usually looking out five years and estimated by analysts that follow the company. A PEG ratio below 1 means a stock is trading below its expected growth rate, which would imply it's undervalued. A PEG ratio above 2 would signal the stock price has exceeded the future growth rate and might be overvalued. Factors like the age of the company, the nature of its business, and how the estimates were determined can affect the accuracy of this figure as a predictor of a fair stock price, so be careful how you use it.
  • Profit margin: The profit margin is the money left over after paying all of the costs of running the business. To calculate it, divide net income by revenue. Generally, the higher the margin, the more profitable the company. Companies that increase their profit margin are controlling costs, either by squeezing efficiencies out of the business, adding new high-profit business segments, or cutting out unprofitable ventures.
  • Price-to-sales ratio (P/S): The price-to-sales ratio works better than P/E for early-stage companies that have yet to report earnings. To calculate P/S, simply divide a company's market capitalization -- the total shares outstanding times its share price -- by its revenue. For very-early-stage companies, you can use future expected sales in the calculation.

Using these metrics on Chicago stock McDonald's in June 2019, we find the company trades at a trailing P/E ratio of 27.48 (and forward P/E of 24.30), which are both just a bit higher than the S&P 500 average. Its PEG ratio is 2.82, which suggests the stock's price right now is overvalued compared to its growth projections. Its net profit margin at the end of April was 28.2%, which suggests a profitable company doing well.

Because McDonald's is a veteran company that has a long track record of earnings, its P/S ratio doesn't really provide a meaningful figure for evaluation. Taking the other metrics into account, though, the data suggests that McDonald's is doing well at the moment but may be priced a bit high compared to growth projections, and is therefore not a bargain investment.

What should investors in Chicago stocks be looking for?

Ask a stock analyst to identify what an investor should look for when considering a business in which to buy stock and a few things will jump right out:

  • Competitive advantage: A competitive advantage keeps a business ahead of the competition, and Chicago businesses have plenty. It could be the patents they hold (AbbVie, Motorola Solutions), the high cost of switching to a competitor (Northern Trust), complicated regulations that limit access to the market (Boeing, Exelon), or cost efficiencies (Allstate) that these companies know how to take advantage of. These companies have effectively created a moat around their financial fortresses that allow them to generate durable growth.
  • Cash aplenty: Cash is what makes a company work. It pays the bills and finances new growth projects. Companies with high debt and not much cash on the balance sheet or little cash flowing in are potential trouble. Free cash flow -- what's left over after funding operations and growth -- can be used to pay for share repurchases and dividends that make investors happy.
  • Strong leadership: Investors should like to see managers who invest right alongside them in the companies they operate. You can find more details on management's investment in their companies from a company's annual 10-K report. Company leaders with years of relevant experience also have been shown to make a difference. And managers who can work well with business partners add something extra to the equation.

Companies that fit two of the three factors could be solid investments. Ones that nail all three increase the chances that you've found a great investment. 

A view of the Chicago skyline from the Chicago River.

A view of the Chicago skyline from the Chicago River. Image Source: Getty Images.

What are the risks facing Chicago stocks?

There are always risks to factor into your investment decision. These can include:

  • Management risks: This has to do with a company's day-to-day operations. Discontinuing a key product line, handling production costs poorly, or making an investment decision that affects a company's ability to repay its debts are all examples of how management decisions can affect a stock.
  • Sociopolitical risks: Political and/or social events like a terrorist attack, war, trade war, or an election can, directly and indirectly, affect financial markets and investor attitudes and outlooks.
  • Currency risk: Changes in the exchange rate between two relevant currencies can affect a company's bottom line, especially if it has a significant international presence and lots of foreign sales.
  • Interest-rate risk: Many companies finance their operations through short-term loans and the sale of bonds. A change in rates can make it more expensive (or cheaper) to operate and impact profits.
  • Inflation risk: Increases in the prices of goods and services can force a company to charge more to recoup the expense. Increase the price too much and you risk alienating customers to the point that they go elsewhere.

How a company manages these risks can make all the difference. For example, Chicago stock Caterpillar is one of the largest construction and mining equipment manufacturers in the world, with almost $55 billion in revenue over the past year. In the past 18 months, the company has had to deal with sociopolitical risks out of its control related to the U.S.-China trade war and increased tariffs on materials like steel. Because it uses so much steel, Caterpillar has had to make significant (and sometimes costly) adjustments to where it buys its steel to address the long-term risk.

Caterpillar has also seen its earnings affected by changes in currency value in countries where it does regular business. Economic slowdowns in China and Europe have dampened the value of their currencies. If the U.S. dollar's value strengthens, the revenue coming in from foreign clients loses some of its value.

The steady rise in interest rates this past year has had some effect on the housing market and business expansion plans, lowering demand for Caterpillar construction equipment. Management said it would be increasing prices 1% to 4% on equipment it sells in 2019 to account for some of these issues. Management projects that the strengthening U.S. economy and hoped-for interest-rate cuts can offset the price hikes without creating a drop in demand.

When it comes to Chicago stocks, there are risks that this particular city forces on a company doing business there. While Chicago's overall cost of living is about 1% below the national average -- which can make it attractive to a business with lots of locally based employees -- Forbes ranks Chicago 140th among 200 U.S. cities for the cost of doing business, indicating that factors like taxes, regulations, rent and leases, etc., can make it somewhat more expensive to operate a business there. Median household income for the metro area is $68,604, which puts it above the national average, and this implies that employees living and working there might expect higher-than-average wages.

What companies might come to Chicago?

The City of Broad Shoulders is centrally located between European and Asian markets and within the North American Free Trade zone (and its potential successor, the United States-Mexico-Canada Agreement zone). The metro area's economic output -- its gross domestic product -- is larger than that of many countries. Chicago's GDP of $609 billion would have ranked it 21st in the world, just behind No. 20 Saudi Arabia and ahead of No. 22 Argentina, according to a 2016 World Bank report.

Chicago's industrial mix is a close match for the nation's, with no single industry employing more than 12% of the workforce (just over 4 million people). The city is home to more than 400 major corporate headquarters, including 36 in the Fortune 500. These factors are part of why Chicago was one of four U.S. cities to be named on a list of "Cities of Opportunity" by PricewaterhouseCoopers in 2018. It received the designation for fostering economic innovation and "common wellbeing."

Like any large city, Chicago has its issues to wrestle with, and they can have some small effect on the companies that are based there. Issues like racial segregation, the disappearance of industrial jobs, and rising city/county budgets are all stressors that Chicago's metro area is working to address. It's important that the city does so if it wants to continue to attract new investment and keep the companies it has.

Chicago is making the effort to attract more tech companies, an underrepresented sector in the area. The city listed about 14,000 tech businesses and 341,000 tech workers in 2017, and it's working to grow that representation. As Silicon Valley becomes more expensive to operate in, cities with a lower cost of living, like Chicago, offer an alternative location for tech companies to set up shop that will attract the younger, tech-savvy workforce those companies want as employees.

Studies have shown that people under 35 with expertise in IT (information technology) prefer the slew of opportunities and attractions that cities feature and appreciate things like public transportation and a family-friendly atmosphere. Chicago offers that.

Among the better-known tech companies basing their headquarters in Chicago are the nation's leading online and mobile food-ordering and delivery marketplace Grubhub, e-commerce marketplace Groupon, public relations and earned media software company Cision, personalized clothing service Trunk Club, privately held parking-reservation service and app SpotHero, and privately held financial tech company Avant. The city announced in November 2018 that 16 local technology companies had added or would be be adding a combined 2,000 jobs in Chicago in 2018 and 2019. Look for more tech to set up shop in the Chicago metro area.

Is now the time to buy Chicago stocks?

If you look at some of the top stocks based in Chicago on an individual basis in the summer of 2019, buying them right now is admittedly a mixed bag. Boeing stock is down over serious issues with its 737 MAX plane; Kraft Heinz stock is down on issues including a writedown, an SEC probe and a slashed dividend; McDonald's stock is up in recent years because of some smart changes in strategy; AbbVie stock is down because it just offered to buy Allergan in a $63 billion deal and take on a lot of additional debt to do it; and United Airlines stock has suffered of late over economic issues with China.

If you already own shares of Boeing, Kraft Heinz, AbbVie, or United, you're probably not too pleased at the moment. If you're thinking of buying these stocks, the decreased price could present a good opportunity to get in. 

The actual act of buying Chicago stocks can be as simple as setting up a brokerage account, either in-person or online, determining which stocks you want to purchase (an admittedly harder task), and placing your buy order. When determining the Chicago stocks to buy, the best plan really boils down to buying great companies and holding them for the long term. Patience plays a big role. The best investments don't need to be checked daily because they're solid companies with competitive advantages and strong leadership.

Chicago has created a unique identity for itself as a globally diverse economic powerhouse where top companies can operate and, in many cases, thrive. The populace has a Midwestern "can-do" attitude and they've built their city on a strong foundation and used that to fuel growth for the companies that have chosen Chicago as their home.