Large and In Charge: Mega-Caps Draw Wall Street’s Attention

Wall Street analysts: think "big" in small market.

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Vanguard Investments founder John Bogle once said that “if you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” The stock market may not have sunk quite that low yet, but the S&P 500 has lost 13% so far in August.

The good news, if there really is any, is that an Associated Press survey of leading U.S. economists says the economy won’t slide back into a double-dip recession. The likelihood of a recession within the next 12 months is 26 percent, the economists surveyed said. (They gave a double-dip recession a 15 percent chance in June.) On the other hand, they said the economy would only grow around 2 percent into next year.

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Faced with such a lackluster outlook, investors seem to be moving toward large-cap stocks, those publicly traded companies with a market capitalization value of more than $10 billion. Appearing on CNBC this morning, Peter Toogood, director of investment services at Old Broad Street Research, said large cap stocks are so cheap right now “they’re ridiculous.”

“Dividends are strong and valuations are at a generational low for those stocks,” he said on CNBC, pointing to behemoths like GlaxoSmithKline and Unilever as good examples of large-cap stocks that can withstand the heat from a market that could actually fall to the lows that Bogle mentions.

Other say that “mega-cap” stocks — stocks with high yields and high earnings growth and market capitalization greater than $200 billion — could be relatively safer picks for anxious investors. Westport, Conn.-based Birinyi Associates Kevin Pleines said in an Aug. 19 research note that mega-caps are “high quality, fundamentally sound possible buy ideas” in an “ugly” market.

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He listed 16 S&P 500 companies that seem to fit the bill, all with dividend yields above 1.5%, including Intel, IBM, Caterpillar and Qualcomm. Actually, mega-caps may even offer more stability than Treasuries right now, he said.

“Dividend yield on the S&P 500, at 2.25 percent, is higher than the yield of the 10-year US Treasury,” he noted. “This is only the second period since the 1950s where stocks have yielded more than bonds.”