Large-cap stocks can be a great and useful part of an investment portfolio. If you understand the part they can play, what they can’t do, and how to maneuver through some confusing and changing information.
What Are Large-Cap Stocks?
This question should be the easiest to answer. It starts with the concept of market capitalization, usually called the market cap, which is a measure of a company’s size, calculated by multiplying the number of outstanding shares times the current price per share. The number can vary over time, even one day to the next. There’s a rough way of categorizing companies by their general size: small-cap, mid-cap and large-cap.
Large-caps are typically described as being those companies with a market cap above $10 billion. Mid-caps are companies with market caps between $2 billion to $10 billion, and small-caps have between $300 million and $2 billion. But none of these designations are hard and fast.
“We tend to follow a large-cap firm that is at least about a $10 billion to $15 billion market cap,” says Brian Jankowski, a senior investment analyst and trader at Fort Pitt Capital Group.
Others have moved the bar up given how massive the largest corporations currently are. “We characterize anything above $50 billion as large-cap, because of what the market has done over the last decade and the growth of companies,” says Dan VanTimmeren, a managing partner at LaFleur & Godfrey Private Wealth Management. “You have mega-cap companies that are over a trillion dollars in market cap. That’s the dramatic difference over the last decade.” Apple, Google, Microsoft, Amazon and Saudi Arabian Oil Company have market caps greater than $1 trillion.
But a quick look at the S&P 500 and you’ll see the variance within stocks labeled as large-caps. For example, financial services and bank State Street ($22.7 billion market cap), sticky label manufacturer Avery Dennison ($14 billion) and seasonings and condiments company McCormick ($24.1 billion).
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Large-Cap Vs. Small-Cap Stocks
The bulk of attention in investing tends to focus on large-cap stocks for both understandable and practical reasons. Corporations that are big to titanic in size bring in sums that are difficult to comprehend but often matched in scale by earnings. They span the globe with their influence. Many pay dividends and undertake share buyback programs to reduce the number of outstanding shares, boosting value per share to deliver more value to investors.
Those companies are also small in number. The S&P 500 is, by definition, the 500 largest public companies. The Dow Jones Industrial Average is only comprised of 30 stocks. With such size, comes the increasing difficulty of obtaining and maintaining significant growth, which is one way to increase the value of a portfolio.
A small-cap company, in comparison, is tiny, with narrower and more focused product lines, service and operations, making them easier to analyze in theory, and yet with the potential for big changes in size and value. Small-caps also tend to be more volatile, which makes them more risky than large-cap companies.
While small in size, small-caps are large in number, with more companies in the basket than all large-caps and mid-caps put together. That becomes a complication for the average investor. Analysts tend to focus on companies with bigger market caps. It’s what many institutional and individual investors primarily look at. The more limited number also makes it easier for brokerages, equity analysts, pundits and others to track. There aren’t enough people to cover the thousands of different small-caps. Even if the large-caps are more complex to understand, there is a lot of help available, often for free.
Large-Cap Stock Performance
Individual stocks can swing up and down in price, and there are times the bulk of available equities can swoon or surge. But over the long run, the stock market pays off. “If you invested $1 at the end of 1925 in [an index, or broad collection, of] large-cap stocks, at the end of 2022, you’d have $11,535,” says Robert Johnson, chairman, CEO and cofounder of Economic Index Associates.
Small-caps would have done better, returning $49,052 on that single dollar. But they are more volatile, with larger swings on the whole, and require more attention.
As investment experts always say–usually because they legally need to–past performance is no guarantee of future results. Because large-caps have acted certain ways in the past doesn’t mean they will again. The years from 2000 to 2009 are called the “lost decade” because of poor performance coming out of the Global Financial Crisis.
However, for the most part, investing in large-cap stocks can provide a base of stable returns and reduced volatility, if not larger return potential of smaller but riskier stocks. “It doesn’t necessarily hold true in a [shorter] time frame, even month by month or year by year,” says VanTimmeren. But “stretch it out over five- and ten-year time periods, which is what most investors should do, you’re going to have those consistent returns.”
They also have important strengths in their markets. “Large-cap companies, generally speaking, have higher balances of cash on hand or the ability to access liquidity quickly,” says Marc Dizard, chief investment strategist for PNC's Asset Management Group. “As a result, they also come with higher credibility and have proven through their growth that their presence is well-established. We find this to be beneficial in more challenging parts of the business cycle, such as slowing expansion or contraction. We especially like quality exposures in challenging times, as they are the most profitable, most consistent, and least-leveraged across the large-cap space.”
One of the advantages to look for is a solid and stable balance sheet, with plenty of cash and manageable to low levels of debt. A good history of dividends can be a good sign that value is getting passed to investors. “A company paying a 3% dividend only needs a 7% return through stock appreciation to get double-digit returns,” VanTimmeren adds.
Also, sometimes the drive for higher returns may not mean as much as it seems, according to Tim McCarthy, co-CEO and chairman of simulated investment competition platform MarketGoats as well as a former chairman and CEO at Nikko Assets Management and former president at Charles Schwab.
“There have been times when in U.S. equities the difference between the top of the worst quartile and the bottom of the best quartile is 70 basis points, 80 basis points,” McCarthy says. That’s 0.7% or 0.8%. “It’s decaf non-fat latte, why bother?” In other words, don’t sweat trying to get every little bit.
An index fund can be helpful, letting you invest across a wide-ranging number of large-caps at low costs. But even then, you need to look hard because not all indexes are the same. The S&P 500 is a market-weighted index, meaning the bigger a company’s market cap, the more it’s represented in the index. The top ten stocks make up close to 30% of the index’s entire market value, which means it’s heavily tech.
You can get a mutual fund or exchange-traded fund (ETF) that holds a mix of stocks to look like an entire index like the S&P 500. Or you can look for an equally weighted S&P 500 index fund or ETF that will be more diversified because it depends less on the performance of the one index.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
Best Large-Cap Stocks to Buy Now
Finding the right large-cap stock for your portfolio depends on your needs, interests, attitudes towards risk, and other factors.
You should do the basic homework: check financials and current and recent stories to see how the company has been doing, look at reports from analysts, consider history of dividends or stock buybacks to see how value might be transferred to owners.
Also pay attention to what areas of business a company is in. Large-caps are more complex than smaller companies. A company might have exposure to multiple industries and geographic regions, adding diversity to your portfolio without having to explicitly invest in different sectors.
At the same time, large and stable doesn’t always equate to safe investments. “Investors should always do their homework and look at the company’s competitive edge, market prospects, competitors, financial well-being, dividend track record, future growth prospects and overall market prospects,” says Emil Åkesson, founding partner and chairman at CLC & Partners. “After all, type-writers might have seemed a great bet back in the 1970s, but with some proper analytical efforts and a finger on the pulse, the demise of that entire market could have been predicted.”
You should also look for clarity in a company’s financials. Back in the heyday of Enron, experts found it difficult to discern where profits were coming from. That was because of fraudulent accounting practices. The more complex and indecipherable the corporate business model, the warier you should be.
While no single stock is necessarily right for everyone, here are some examples of large-caps to consider.
Berkshire Hathaway (BRK-B)
Some companies are famous for their lineage, some for their technology, but Berkshire Hathaway is known for the long-lasting CEO, legendary investor Warren Buffett, and his partner in profit, Charlie Munger. Their long-term view of investing has proven to be successful, decade in and out. The original stock, BRK-A, is, at the time of writing, more than a half a million dollars for a single share, so something the average person can’t manage. However, there’s a secondary stock, BRK-B, which mirrors the A shares that is more reasonably priced, recently trading around $330 per share. One question about Berkshire Hathaway is that Buffett and Munger are well into their 90s and won’t last forever. However, there is already a named successor, Gregory Abel, a vice-chairman of the company, who’s been there for two decades and currently is head of Berkshire Hathaway Energy.
Microsoft (MSFT)
“This tech giant boasts a solid financial footing and a diverse product lineup, including Windows, Azure, Office 365, and gaming,” says Åkesson. “With consistent revenue growth, profitability, and an ongoing shift towards digital transformation and cloud computing, Microsoft has a robust dividend history and growth,” he added. “They have also moved away from a heavily consumer-focused company and moved significant business into enterprise solutions, reducing risk from regulatory authorities.”
The combination of both consumer and business customers means there is also more stability when market conditions and buyer preferences change. Revenues have increased steadily since 2016 and net income began to sharply increase starting in 2021, according to data from S&P Global Market Intelligence. Dividends per share were $2.48 in 2022.
Starbucks (SBUX)
Although labor disputes with unions have made the headlines, Starbucks has also continued to prove that coffee can brew profits. In its second quarter of 2023, ended in April, global comparable store sales were up 11%, a combination of a 6% increase in transactions and 4% increase in average tickets. Those are stronger than inflation, showing significant improvement. U.S. and China sales, with 16,044 and 6,243 sales respectively, were 61% of the company’s global business. Operating margins were up 15.2%, from 12.4% last year. Earnings were up 36% year over year. A new CEO, Laxman Narasimhan, brings the possibility of different innovation and improvement. The roughly 2% dividend is an additional bonus.
Vanguard Large-Cap ETF (VV)
“This ETF provides a core holding of large-cap U.S. stocks, also with a low expense ratio of 0.04%,” Åkesson says. The five-year annualized growth rate has proven the resilience of large-cap U.S. stocks in a challenging market. The dividend yield of 1.6% is quite attractive and the portfolio is diversified. VV offers a solid foundation for investors seeking exposure to the large-cap U.S. market. According to Morningstar, the “ETF combines a broadly diversified portfolio of U.S. large-cap stocks with low turnover and a miniscule price, providing it with a durable edge over its Morningstar Category peers.” It tracks the CRSP U.S. Large-Cap Index, which captures about 85% of the equity market by market cap.
Invesco S&P 500 Equal Weight ETF (RSP)
Market cap-weighted indexes can make sense. But it is good to have the option of using a differently weighted index to avoid overreliance on the handful of dominant stocks at the top of the S&P 500. The Invesco S&P 500 Equal-Weight ETF is based on the S&P 500 Equal Weight Index. The fund rebalances quarterly to adjust for changes. It can have its ups and downs, like when there is a tech stock rally that drives up the market cap-weighted S&P 500 index. But since its beginnings in 2003, it has seen strong growth from the initial $28 a share to about $140 at the time of writing.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
