Mega-Caps Are Your Best Friend

 | Mar 06, 2014 | 5:30 PM EST  | Comments
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pot

In any contest, there are times to play offense and times to play defense. In a stock-market contest, the time now is for defense. Lest you presume that being defensive means not making any money, you would be presuming incorrectly. Over the past four years, the University of Alabama's Crimson Tide football team, behind the leadership of Head Coach Nick Saban, has demonstrated that having a strong defense can lead to winning, and a lot of it (I'm a Georgia Bulldogs fan, but I give credit where credit is due). 

In the stock market, defense also can be the best form of offense. In this case, being defensive is as simple as it sounds: companies with strong fundamentals, entrenched business models, and fortress like balance sheets. In other words, mega-cap stocks look very sensible for the defensive investor right now. 

One name to consider is General Electric (GE), a company that makes light bulbs, jet engines and everything in between. The shares yield 3.4% and just this week, CEO Jeff Immelt picked up more than $3 million worth of company shares. In his recent annual letter, billionaire investor Warren Buffett said that betting against America is a losing bet. General Electric is a wonderful corporate snapshot of America. Every single household in America, whether they realize or not, relies on GE.

Speaking of Buffett, his recent $3 billion investment in Exxon Mobil (XOM) should not be taken lightly. Ironically, Thursday's Wall Street Journal had an article about how after years of massive capital expenditures and relatively low returns on capital, Exxon is pursuing a path of lower capital expenditures, thereby improving return on capital. ROC happens to be one of Buffett's favorite metrics. A coincidence? Perhaps -- but maybe not. With a $400 billion market cap, Exxon is the pinnacle of defense.

If you are patient (and you should be in the stock market), Potash (POT) is very a defensive play. The stock has moved a little since I last wrote about it in February and it was yielding close to 5%. Still, shares trade for about $35, yield 4.2% and trade for 17x on what may likely turn out to be depressed earnings. Indeed, since the potash cartel broke up, future market prices may naturally settle lower, but this is a company that today generates 19% on equity and boasts operating margins of 35%.

You may not crush your opponent, Mr. Market, by a wide margin by playing defense, but odds are over time you will win the game -- even if it's by a couple of points. But winning is winning, and no one ever went broke taking a profit.

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