Two Large-Caps Retain Their Value

 | Nov 19, 2013 | 9:00 AM EST
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The market has had one heckuva run over the last year. During the previous 12 months, the S&P is up better than 30%. Unfortunately, earnings growth has not kept up with the rise in stock prices.

Earnings currently are growing at a mid-single digit pace year-over-year. This means the rally has been fueled primarily by multiple expansions and not by expanding earnings.

This predictably has led to more and more talk about a possible stock market bubble. Barron's had a cover story about this in their magazine this past weekend. It is also becoming an increasingly discussed topic on CNBC. Even Carl Icahn is getting into the act, saying the market could be set up for a "fall".

Icahn has some valid points in saying the market has gotten ahead of global economic fundamentals. I also agree with his conclusion that a good portion of the middling earnings growth in the market right now is being driven by low financing costs and stock repurchases, not because of increases in demand.

I don't think the market is in "bubble" territory yet, although numerous highflying equities -- such as Tesla Motors (TSLA) -- have achieved that status. It is getting harder to harder to find bargains in the equity markets right now compared to earlier in the year.

I have increased my cash position over the last couple of months. I can easily see a 5% to 10% pullback over the next three-to-six months and I want to be prepared to deploy new capital should that indeed occur. Among several equities on my "shopping list" are two large-cap stocks already in my portfolio. They have significantly underperformed the overall market over the last year. Both are cheap and should have a brighter 2014. I will add to either if the market kindly provides lower entry points.

BP plc (BP), the energy behemoth previously known as British Petroleum, has had a very difficult couple of years, to put it mildly. It is never a good sign at an oil major when management spends more time with its lawyers than its geologists.

However, the company is almost through with the aftermath of the gulf oil spill of 2010. BP has sold off assets, paid off tens of billions of dollars of claims and is almost done moving through its litigation gauntlet. In short, 2014 is shaping up to be a better year.

Revenue declines should slow in the New Year as asset sales are almost complete. In addition, the shares have a reasonable valuation at 9x forward earnings. Finally, the stock pays an almost five percent dividend yield which provides nice succor while an investor waits for the company to put the last vestiges of its recent problems behind it.

I also continue to be positive on Apple (AAPL). Although the shares have gained more than $100 a share since their lows in late June,  the stock has basically gone nowhere over the last 12 months. Earnings estimates have also increased substantially over the past two months as the new versions of the iPhone continue to sell well.

The company should sign a distribution deal with China Mobile (CHL) over the next few months which will bolster their sales efforts in the Middle Kingdom substantially. Apple's recent deal with Japan's NTT DoCoMo (DCM) and its over 60 million subscribers has accelerated sales in Japan impressively.

The company is returning nearly $10 billion a quarter to shareholders through dividends and share repurchases, with Carl Icahn continuing to press for more. Most importantly, the shares are still cheap. After subtracting the company's massive cash hoard, the stock goes for less 8x forward earnings.

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