24/7 Wall St.

It is almost every day that we take a look at the market capitalization rates of some of America’s largest public companies in our own Real-Time 500 reading.  The recession killed many stocks and their respective market caps, but many have recovered from their falls from grace.  The definition of a mega-cap differs from source to source, but $100 billion is the 24/7 Wall St. threshold.  We recently conducted a search through mega-cap stocks and as of this week we counted some 26 members in our mega-cap club.

Motley Fool previously counted a $50 billion threshold to be in place for a ‘mega-cap’ status, but Investopedia now counts the mega-cap threshold as being $200 billion. Kiplinger’s mega-cap portfolio is simply the ten largest market caps in America, and some others use $100 billion as the threshold.  Fifteen years ago and longer I used to use $50 billion as the threshold, but that was because all of the values of companies were so much lower on a nominal market capitalization rate back then.  Times change, and apparently so do ‘values.’

Our aim is to identify the next wave of mega-cap stocks.  Let’s dub it “The 2011 to 2013 Class of New Mega-Caps.”  Some will require a bull market continuation to join this prized class, but some will likely make it on their own.  Those which are likely to make the list are as follows: Abbott Laboratories (NYSE: ABT); Amazon.com, Inc. (NASDAQ: AMZN); Cisco Systems, Inc. (NASDAQ: CSCO); Hewlett-Packard Company (NYSE: HPQ); Goldman Sachs Group, Inc. (NYSE: GS); McDonald’s Corporation (NYSE: MCD); Occidental Petroleum Corporation (NYSE: OXY); Qualcomm, Inc. (NASDAQ: QCOM); United Technologies Corporation (NYSE: UTX); and The Walt Disney Company (NYSE: DIS).

If you review the first page of our own REAL-TIME 500, all 25 companies are mega-caps.  What a difference a monster rally can make.  If you go to the page-two for companies ranked 26 to 50 by market cap, then you will see that there is a whole host of such companies with market caps within striking distance of the $100 billion threshold.  We have outlined what analysts are already looking for, what each has done, and what the scenarios are that will allow each of these to join the mega-cap club.

Abbott Laboratories (NYSE: ABT) could rather easily find itself in the mega-cap field along with Johnson & Johnson, Merck & Co., and with Pfizer.  Its market cap is roughly $82 billion, and with shares around $52.70 its 52-week range is $44.59 to $53.75. Abbott’s stock has peaked around $60 before and it will likely take a share price north of $63.00 to reach the mega-cap status.  Thomson Reuters has a consensus price target of about $58.12 on the stock, so Abbott’s chances of attaining the $100 billion market cap are feasible in the not too distant future. 

A market observer doesn’t need a lesson in the medical sector to know that growth has mostly stalled.  The sector has spent years with the band Talking Heads singing ‘We’re on the Road to Nowhere.’  Now it seems that the tide has turned for some in the sector.  Abbott is still managing to grow more than many peers.  It is even possible that Abbott could choose to make an acquisition, which could drive its shares into the $100 billion club.  It could acquire a device company, a smaller drug company, or even a biotech outfit.  Your guess is as good as anyone’s who or what it might buy.  Fortunately this outfit might get there all on its own.

Amazon.com, Inc. (NASDAQ: AMZN) has been one of the greatest growth stories of the internet.  It has become THE envy and fear of every just about retail distribution and order-taking conglomerates whether they are brick and mortar or online-only.  With shares north of $203.00 and having hit all-time highs this week, its 52-week range is $105.80 to $205.29 and its market cap is already above $91 billion.  Amazon’s stock is currently above its $197.50 or so consensus price target from analysts, but some price targets are much higher.

Jeff Bezos has amassed a monster empire here.  It has been experiencing margin compression, yet that has not hindered its share performance as it is aggressively building for the future.  The Kindle, Zappos, the cloud, Audible, and a dozen other new initiatives and opportunities can be the next growth drivers.  The company has moved to sell everything that is legal to sell and it collects a fee for being the destination referring agent. Internet taxation issues are going to remain here and it is unlikely that the no-tax plan can continue indefinitely, but that might not matter.  Online shopping is here to stay and its customers are likely to continue shopping online rather than venturing out to 15 stores for what can be found in one online site’s shopping basket.  Most competing efforts to date have revolved around media and virtual products rather than the sale of physical goods. 

Cisco Systems, Inc. (NASDAQ: CSCO) is extremely close to being a mega-cap, and it has in fact been a mega-cap not too long ago.  At $17.70, Cisco has a market cap north of $97 billion and it has a 52-week range of $16.52 to $26.80.  The consensus analyst target is north of $22.00, so analysts are already expecting the stock to regain its mega-cap status.  Cisco is also a member of the Dow Jones Industrial Average.

John Chambers has made many acquisitions and its new data center drive have culminated with a bulky and micro-managed structure.  Now the company is restructuring.  We have even seen some call for the company to just initiate a break-up of its operations.  That won’t likely happen if John Chambers is there.  Cisco is just starting its dividend initiations after years of wasting billions and billions on repurchasing its stock.  Earnings are due this week and there is currently no great catalyst other than that Cisco screens out as a value stock now.  What a difference a decade makes.

Hewlett-Packard Company (NYSE: HPQ) is another tech giant that was a mega-cap before and has fallen from grace.  At $41.50, its 52-week range is $37.32 to $50.33 and its market cap is basically $90 billion.  Thomson Reuters has a consensus price target of over $53.00 and it only requires a share price of about $46.00 for the mega-cap status to be reached.  H-P is a member of the Dow Jones Industrial Average.

The CEO shenanigans of 2010 and the replacement by Leo Apotheker have damaged the reputation of the company.  Without Mark Hurd in charge, the company has been unable to run and run higher.  H-P’s move into IT and services has helped to transform the company and kept it from just being a PC and peripheral sales entity.  H-P traded above $46.00 as recently as February, so thinking about a mega-cap status here is not that far off base even if it has overpaid in some deals. When that comes is anyone’s guess, but earnings are not that far out.

Goldman Sachs Group, Inc. (NYSE: GS) managed to hold up better than its TARP-peers during the great recession.  With shares around $150.00, its market cap is about $82 billion and its 52-week range is $129.50 to $175.34.  For the bank holding company without a bank to become a mega-cap it only needs to get shares up in the $180 to $185 share price.  Thomson Reuters has a consensus price target north of $194.00 as it is.

Now that Goldman Sachs is relying less and less on a killer trading operation and more focused on investment banking and asset management, it may take longer than it would have otherwise for the company to reach that mega-cap status.  It might not even happen when Lloyd Blankfein is in charge.  Warren Buffett may not even wait to unload his warrants until that time.  Still, many already feel that Goldman Sachs will be a mega-cap at the official price targets today.  The company is not nicknamed “Golden Slacks” without reason. The coming IPO of Glencore may even give Goldman Sachs some ‘profit and valuation envy’ and that might make the firm reconsider just how much it wants to wind down profitable trading operations because of the political environment of today.

McDonald’s Corporation (NYSE: MCD) just keeps managing to grow and grow and this another member of the Dow Jones Industrial Average.  With shares around $79.50, its 52-week trading range is $65.31 to $80.94.  The market cap is already about $83 billion now.  For shares to be worth $100 billion, a new all-time high price of over $95.00 per share will be required.  Thomson Reuters has a consensus price target of almost $86.00 already.

The success of the Golden Arches has managed to surpass what many investors and pundits would have ever dreamed.  This one company is amazingly worth more than the entire US-based public restaurant sector.  McDonald’s has grown internationally as you saw with the recent success of its Latin American franchisee’s great IPO, but it has lagged Yum! Brands’ growth in China.  Maybe it is China that gets the company there or maybe it is Latin America.  As long as the obesity fight against the fast food chain does not cripple all players, then McDonald’s could be a mega-cap stock within about two years.

Occidental Petroleum Corporation (NYSE: OXY) is the next great energy giant in the making.  With shares around $107.00, its market cap is around $87 billion and the 52-week trading range is $72.13 to $117.89.  Analysts have a consensus price target of almost $120 per share and the stock would only need to hit a price of around $123.00.

Occidental is one more energy giant that is going to be oil price dependent.  The stock has already hit all-time highs in the last year, so a mega-cap status would require yet more all-time highs.  Maybe the company will just announce a stock-for-stock acquisition of a mid-cap oil or gas player that it can show is accretive to earnings.  That is not outside of the realm of possibilities and others have done that.  What if oil hits $120 again per some fresh economist targets?  Investors often hate chasing stocks close to all-time highs, but sometimes it is those stocks which offer the best returns.

Qualcomm, Inc. (NASDAQ: QCOM) is the ‘almost’ mega-cap that many investors might not have considered a mega-cap without seeing it stated.  With shares around $56.50, its 52-week range is $31.63 to $59.84 and its market cap is over $94 billion.  For the stock to reach the mega-cap status it only requires a price of just over $60.00.  Thomson Reuters already has a consensus price target objective above $64.00.

It was CDMA and WCDMA that got the company going, now it is smartphones, the SnapDragon microprocessors, and the continual upgrade-cycle from consumers around the globe driving the stock.  Qualcomm has also been paying a higher dividend to bring in a new base of shareholders.  It really feels as though the only barrier to Qualcomm’s mega-cap status is just time.  A sudden economic slowdown won’t help, but that is true for most future mega-caps.

United Technologies Corporation (NYSE: UTX) is one that many investors might have already considered a mega-cap due to its conglomerate structure and with its Dow Jones Industrial Average membership.  With shares around $89.75, its market cap is over $82 billion and its 52-week range is $62.88 to $90.67.  Admittedly, this requires a gain of about 21% to almost $110.00 per share before the mega-cap status is reached.  Thomson Reuters currently has a consensus price target above $97.50.

One of the driving forces behind United Tech as a future mega-cap is that it has managed to surprise with share gains.  It also held up without a full GE-styled implosion during the peak of the recession as it is less geared to financial services.  The company might make an acquisition to reach a mega-cap status earlier than it would on its own.  We don’t want to consider growth in that manner, but if the economy can hold up then UTX might be the next conglomerate to join the prized mega-cap class.

The Walt Disney Company (NYSE: DIS) is yet another member of the Dow Jones Industrial Average which might become a mega-cap stock.  Around $43.50, its market cap is almost $83 billion and its 52-week range is $30.72 to $44.34.  Reaching the $100 billion market cap would require a share price closer to $52.50, but Thomson Reuters already has a consensus price target of about $49.00.

Shares of ‘The Mouse House’ have just recently hit new all-time highs.  Its acquisition of Pixar and Marvel have added in an entire new future outside of the old core-Disney operations.  It has theme parks, a cruise line, ABC and ESPN, and many more brands that are all performing well.  This one is not without risks, but the shares are close enough to the mega-cap status that the much-loved Bob Iger is strong enough of a leader for investors to treat it as a mega-cap.  This process could easily take more than a year, but some analysts already have a price target that would put Disney in the mega-cap class. 

As with any of the price-dependent articles, these are all dependent upon price objectives and gains.  Market caps also can vary from source to source, but we have generally gone with the share counts offered by the companies in these calculations.  It will take a continued strong economy and may even take a continued bull market for some of these stocks to become the next mega-caps. 

Some of these companies may even falter or stumble along the way.  Either way, the bulk of these companies are likely to be among “The 2011 to 2013 Class of New Mega-Caps.” 

JON C. OGG