Huge and Growing Companies: Make Money in Them the Easy Way
Oct 23rd 2013 4:42PM
Updated Oct 23rd 2013 4:44PM
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some very large-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Mega Cap ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. It holds close to 300 stocks, representing about 70% of the total U.S. market value.
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on extra large companies, sports a puny expense ratio -- an annual fee -- of 0.12%.
Over the past three and five years, it has closely tracked the performance of the S&P 500, which is not surprising, as they have many holdings in common. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why large companies?
Large companies can add some ballast to your collection. Many may not grow as briskly as their smaller counterparts, but in order to reach their current size, they likely have some strong assets and features. And some can grow quite briskly, too.
More than a handful of extra-large companies had solid performances over the past year. General Electric , for example, jumped 26%, is near a 52-week high, and yields 3%. Sitting on more than $130 billion in cash and equivalents, General Electric has been focusing more on its industrial operations and less on its financial ones, and it has been diving into emerging technologies with great success. Its third quarter offered growing margins, a big backlog of orders, and double-digit growth aims for its industrial business. Many see solid gains ahead for GE.
Intel gained 16% but looks attractive to many with its forward P/E of 12 and dividend yield of 3.8%. Its third-quarter results featured solid earnings and gross margins, but disappointing top-line growth. Bears worry about Intel's future, especially with the decline of the PC market, but bulls believe it will develop sizable alternate revenue streams, and its inclusion in Apple products is also a boon.
Other large companies didn't do quite so well over the last year but could see their fortunes change in years to come. Philip Morris International advanced 4% and yields 4.3%, which reflects a recent 11% dividend hike. Its third quarter featured estimate-topping earnings, but also a revenue miss and lowered projections. Philip Morris has been challenged by shrinking cigarette volume, though some regions such as Asia are experiencing growth in smoking rates. Bulls like its innovation and share buybacks.
Pharmaceutical giant Merck gained 5% and yields 3.7%. It has been challenged by competition from generics and slowing growth, and it has announced plans to lay off some 8,500 workers as it restructures. Some Wall Street analysts have downgraded the stock, and bears worry about patent expirations -- it was hit hard by the loss of patent exclusivity for blockbuster Singulair, and other expirations are looming. Merck's pipeline of new drugs is critical but doesn't have many investors excited at this point.
The big picture
Consider adding large companies to your portfolio. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
The article Huge and Growing Companies: Make Money in Them the Easy Way originally appeared on Fool.com.Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, General Electric Company, Intel, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.