When the economy is in the doldrums, large companies tend to have the edge. Not only do they have the financial muscle to buy smaller, fast-growing companies to boost results, but the big boys also generate much of their sales overseas, benefiting from speedy economic expansion in emerging markets.
So far this year the theory has played out: While the Russell 2000, an index of small-company stocks, is down 17.2%, the Dow Jones industrial average, an index of 30 giant U.S. companies, is off only 5.5%.
Below are four favorite picks of money managers who seek out stocks of large quality companies selling at an attractive price.
IBM (
IBM)
P/E: 11.9
YTD return: 16.4%
5-year return: 17.7%
Forget personal computers: IBM has remade itself as a business services firm whose fortunes rise and fall on corporate spending, so it doesn't need a strong consumer economy to bolster growth.
"We like the company's strategy and management," says Richard Skaggs, senior equity strategist for Loomis Sayles.
Caterpillar (
CAT)
P/E: 8.5
YTD return: -20.1%
5-year return: 6.0%
Construction and mining giant Caterpillar has been battered this year over concerns of a double-dip recession. But the company generates 60% of sales overseas and should benefit from increasing action in emerging markets.
"It's a great way to play rising spending in the energy sector long term," Skaggs says.
Microsoft (
MSFT)
P/E: 8.0
YTD return: -8.5%
5-year return: 0.7%
The impending release of Windows 8, an update to the company's operating system that is expected to be tablet-friendly, could give Microsoft's stock a boost. Meanwhile the company continues to pay dividends and buy back shares.
"It's large, profitable, and inexpensive," says Don Yacktman, manager of the Yacktman Fund. Enough said.
Wal-Mart (
WMT)
P/E: 10.6
YTD return: -4.8%
5-year return: 3.0%
When times are tough, consumers go bargain hunting. "Wal-Mart has products that are very relevant for the current times," says Sound Shore fund analyst Jim Clark.
Earnings are expected to grow in the high single digits this year, and the stock recently had a 2.9% dividend yield.
NEXT: Cut your home-loan interest
