How Small Investors can Benefit from Large Caps

blue chip stocks

Large cap stocks can be among the safest stock market investments. These are large companies and are known as blue chip investments.

A blue chip company is defined as “a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services.”

Analysts note that “blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.” And, as a matter of interest, the name “blue chip” comes from poker where the blue chips have the highest value.

These sound like the kind of companies small investors should consider owning, but there is a problem with them from the perspective of the small investor. That problem is their high cost per share.

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For example, we can look at the indexes that contain the blue chip companies. Half of the companies included in the Dow Jones Industrial Average and more than a third (36%) of the companies in the S&P 500 trade at a price of more than $100 per share.

For small investors, high prices per share limit the ability to diversify. While an investor could afford to buy just one or two shares of stock given low commissions at deep discount brokers, this might not be the investor’s best use of capital.

For a small account, the capital committed to a share or high priced stocks could represent a significant percentage of capital. And, the probability of a large move in a high priced stock is generally smaller than the probability of a large move in a lower priced stock.

Even when blue chips trade at less than $100 per share, these are very large companies and the price moves of these large cap companies, again in percentage terms, tend to be smaller than the gains in smaller companies.

That’s logical. It will take more buying power to move a $40 billion company by 10% than it will to move a $4 billion or even a $40 million company.

There Is a Solution

This is a real problem for investors with small accounts but one that does have a potential solution. To begin with, let’s find some large cap stocks to consider buying. We can focus on value and search for large cap stocks with low PEG ratios.

The PEG ratio compares the price to earnings (P/E) ratio to the expected growth rate in earnings per share (EPS). A stock is considered to be fairly valued when the PEG ratio is 1. This recognizes that stocks with rapid growth rates should trade at a premium to stocks with slower growth.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.

stock screener

Source: FinViz.com

Three Stocks Meet Our Strict Requirements

Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.

Bank of America Corporation (NYSE: BAC)

BAC is one of the world’s leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services.

The company provides unmatched convenience in the United States, serving approximately 47 million consumer and small business relationships with approximately 4,400 retail financial centers, approximately 16,000 ATMs, and award-winning digital banking with approximately 36 million active users, including approximately 25 million mobile users.

The company serves clients through operations across the United States, its territories and more than 35 countries. The stock price appears to be consolidating after a recent pull back that is in line with general market weakness.

BAC daily chart

Chevron Corporation (NYSE: CVX)

CVX is one of the world’s leading integrated energy companies. Through its subsidiaries that conduct business worldwide, the company is involved in virtually every facet of the energy industry.

Chevron explores for, produces and transports crude oil and natural gas; refines, markets and distributes transportation fuels and lubricants; manufactures and sells petrochemicals and additives; generates power; and develops and deploys technologies that enhance business value in every aspect of the company’s operations.

Its stock price is in an uptrend, tracking the price of oil which has recently been strong.

CVX chart

Facebook, Inc. (Nasdaq: FB)

FB is the social media power house that has been under fire recently for concerns related to privacy. A recent strong earnings report pushed the stock price up.

FB daily chart

These stocks are all expensive and it could be difficult to diversify these positions. But, call options could be substituted for the stocks. Chevron provides an example.

One hundred shares of Chevron would cost more than $12,000. A 10% move in the stock would deliver a gain of $1,200. Instead, investors could buy one call option which gives them the right to buy 100 shares of the stock at a predetermined price for a fixed amount of time.

For Chevron, an option expiring in January 2019 could be used. The option with the right to buy Chevron for $125 expiring at that time costs about $8.50, or $850 per contract. Now, assume that Chevron moves 10%.

The option would be worth at least $13, a 53% gain. The loss is capped at $8.50 per share. If the stock drops 10% shareholders lose $12 per share, or more.

Options could be a valuable addition to your portfolio, especially options on blue chip stocks.

Any of these stocks could be a potential winner and all worth further research. If you are uncomfortable doing your own research, there is a TradingTips.com trading service, Triple-Digit Returnswhich uses a very specific system for choosing the right stocks to trade.

Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings, mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.

This service provides a recommendation once a week. It could be used for trading or learning how to analyze stocks since each recommendation includes a detailed explanation of the company. To learn more, you can click here.