Why on earth would anyone want to buy a stock of a company with a
market capitalization of more than $100 billion? While it is true
large companies can crush the competition and dominate markets,
growth often is elusive once you reach that size.
Given that future profits in the stock market are a function of
profit growth, owning a $100 billion stock makes little sense. It
is far better to go small. Think about it. A company that is making
$10 million in profits needs to improve by $2 million per year to
reach 20% profit growth. A large company with 10 billion in profits
needs to add $2 billion per year to match that growth.
Do you realize how difficult it is to add $2 billion in new
profits in a given year? Trust me. It is difficult. As such, I
would avoid these five $100 billion companies. They might look like
attractive stocks, but they are not. They are just the opposite -
and not worth a dime of your money.
The Oracle of Omaha is perceived to be a savvy investor, but the
joke might be on you if you buy A shares of
). The $185 billion investment management company might look like a
great stock to own given the insights and management of Warren
Buffett, but buying a big stock like this at premium prices is not
a smart thing to do. I'm pretty certain Buffett would not buy
shares of his own company at these levels.
There is nothing inherently wrong with what Buffett is doing,
but given the size of the company, there are simply fewer
opportunities for Berkshire to grow profits. The company made a few
splashes during the financial crisis but has been fairly silent
since. Having to buy bigger and bigger companies dilutes the value
of their investment. Large companies tend to be fairly priced, as
there are no secrets. I would stay away from this one.
Petroleo Brasileiro S.A. (Petrobas)
If one thing was proven during the recent U.S. debt crisis debate,
it is that our currency and treasury securities still are the king
of the hill with respect to global markets. Now, with a deal
complete, the dollar will be even stronger. At the same time, there
will be pain in getting our house in order. And a strong dollar and
a tough economy will cause a drop in commodity prices.
As such, I would avoid a stock like
). The $223 billion market-cap company is doing great with oil
hovering around $100 per barrel. What happens when oil prices drop
by $20? Shares are likely to trade at late 2008 levels, or $20 per
share. There is too much risk and not much reward in this big-cap
One glaring weakness uncovered during the housing collapse and
financial crisis of 2008 was that certain financial institutions
had become too big to fail. The subsequent rescue of these
behemoths gave the illusion that these companies would be protected
at all costs. That was then, this is now. I'm not convinced
governments and central banks would do everything possible to save
the next large big bank or Wall Street firm in trouble.
Losing that protective blanket, then, increases the risk of
owning a stock like
). The $175 billion global bank has its tentacles in all things
currently troubling to the financial markets including the debt
crisis in Europe. HSBC might not be the first domino to fall, but
there is a scenario out there where they would fall, indeed.
Absent that risk, the growth prospects for such a large bank do
not look promising. The company recently announced big layoffs that
reflect the challenging environment. It sounds like more
retrenching and balance sheet repair is in order here. I would
avoid this stock.
Often, the only way for a giant company to grow is to get bigger.
The profit chase becomes more about swallowing competitors than it
is about innovation and organic growth.
), the large Latin American telecommunication company, made the
move Monday to acquire the remaining stake of fixed-line operator
Telmex. The deal will bring together the interests of billionaire
Carlos Slim. I'm not so sure what the move will do for America
As is often the case, America Movil shares slid on the announced
attempt to acquire the outstanding shares of Telmex. Typically,
mergers of this sort fail to deliver added value to the acquiring
company. More importantly, the deal might raise the specter of
government scrutiny. Already blasted by the government for
anti-competitive moves, America Movil, by consolidating its power,
is likely to bring more attention to its operations.
Monopolistic power and its consequences are just one of the many
risks of owning a $100 billion stock. The natural tendency is to
keep growing, but not if governments become concerned about
competition. The stalemate can be disastrous for investors in these
big companies. Without growth there can be no stock appreciation,
but if governments raise issues, what are you going to do? I would
simply rather put my money elsewhere.
One of the gimmicks used by companies in distress is to perform a
reverse stock split. When shares are perceived to be valueless and
trading for a low dollar amount, executives will do anything to
support the stock price. The idea behind a reverse stock split is
to take shares off the market, thereby artificially raising the
dollar value of remaining shares. Nothing about the intrinsic value
of the company performing the reverse split has changed.
When $111 billion market-cap company
) performed its own reverse stock split, investors should have run
to the exits. Instead of attempting to grow its business or
creatively solve balance sheet problems, management tries to pull a
rabbit out of the bag by changing investor psychology. The trick is
not working. Since the May 9 reverse split, shares of Citigroup
have lost 13%. The split cannot hide fundamental problems with this
company. I would sell this stock.