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Stock Strategist

5 Large-Cap Stocks to Watch

These big companies are selling at a discount.

Large-cap stocks--which Morningstar defines as stocks with market capitalizations of about $8.5 billion and above--have been sorely out of favor in recent years. While small-cap stocks have surged ahead, large caps--particularly big growth stocks--haven't kept pace. After reaching dizzying valuations in the late 1990s, large stocks were crushed in the bear market, and many haven't kept pace with smaller-cap issues as the market has recovered. As a result, the Morningstar Large-Cap Index has posted annualized losses of more than 1% per year over the trailing five-year period.

But it would be a mistake to write off this segment of the market. Indeed, while market valuations are relatively steep across the board, valuations on the market's biggest names aren't quite as nosebleed-inducing as those on small-cap issues. There's also something to be said for owning large companies that have consistently generated top- and bottom-line growth in a variety of market climates.

For this week's Stock Strategist, we began by screening for stocks that are part of the Morningstar Large-Cap Index. Next, we looked for companies that have consistently increased both revenues, operating income, and earnings per share over the past several years. Finally, we added quality screens for return on equity and financial health.

While not all of the stocks that passed are cheap enough to be compelling right now (perennial large growth-stock favorite  Intel (INTC), for example, is trading well above our fair value estimate), it's worth keeping an eye on this list for the large-cap segment of your portfolio. Here are some highlights (star ratings are as of Nov. 30):

Devon Energy (DVN) 
Morningstar Rating: 4 Stars
Business Risk: Average
Robust energy markets and disciplined management have boosted Devon. From the  Analyst Report: "Devon is one of the largest U.S.-based independent oil companies. With about 90% of its reserves and production in North America, Devon has a lower risk profile than some of its more internationally focused competitors. Moreover, Devon's proximity to the U.S. market should allow the firm to enjoy robust sales and higher-than-average margins for the foreseeable future, because large-scale liquefied natural-gas importation is still a few years away."

Gannett (GCI)
Morningstar Rating: 5 Stars
Business Risk: Below Average
Although Gannett is probably best know for publishing USA Today, the company's other media assets are also attractive. From the  Analyst Report: "Gannett has its roughly 100 community newspapers, as well as its flagship publication, USA Today, to thank for its financial success. USA Today boasts the industry's highest circulation at about 2.3 million daily, more than 20% higher than that of The Wall Street Journal. Gannett derives its competitive advantage from this and its other newspapers, which are mostly leaders in midsize and small markets and face limited competition. The company also operates 21 television stations, most of which rank among the top two (as measured by ratings) in their respective markets."

Johnson & Johnson (JNJ)
Morningstar Rating: 5 Stars
Business Risk: Below Average
We think Johnson & Johnson's acquisition of Guidant  makes sense. From the  Analyst Report: "We like J&J's global leadership positions in three attractive health-care business lines: pharmaceuticals, medical products, and consumer products. Each line has excellent long-term growth prospects driven by favorable demographic trends or structural shifts in the U.S. economy toward quality-of-life services. The multiline platform provides valuable diversification in the event of an adverse development in any single business line. The deal to acquire cardiac-device maker Guidant GDT at revised terms will broaden J&J's medical-device segment into the fast-growing cardiac rhythm management business, a logical expansion for J&J."

Wal-Mart (WMT)
Morningstar Rating: 4 Stars
Business Risk: Below Average
Despite concerns over consumer spending and intense competition from Target (TGT), the world's largest retailer looks strong. From the  Analyst Report: "The past couple of years have been lackluster for Wal-Mart, but we think management has a credible strategy to fix the operational problems that have nagged the company. More specifically, the company has announced plans to accelerate store growth, bolster same-store sales, increase profitability, and improve its already-impressive asset efficiency. Already the biggest company in the world, Wal-Mart is still growing sales at more than 10% per year, and we expect the company to maintain (if not improve upon) this pace."

Zimmer Holdings (ZMH)
Morningstar Rating: 4 Stars
Business Risk: Below Average
The orthopedics industry could see pricing pressure in the next few years, but demographics look favorable for growth. From the  Analyst Report: "Fortified by its acquisition of Centerpulse, Zimmer Holdings has catapulted itself into the leading position among orthopedic-device makers. The characteristics of the orthopedic industry are conducive to digging economic moats. Proprietary products with long-term clinical histories and high switching costs erect powerful barriers to entry and give device makers attractive pricing power. An aging and more active population, as well as an increase in the number of patients requiring revision procedures, should support sales volume growth for many years to come."

To run this screen and see all the stocks that pass, click  here. Note: The stocks mentioned above passed our screen as of Nov. 30, 2005. The results may change due to daily price fluctuations or other factors. After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (You will need to be logged in as a Premium Member to view and save the complete screen.)

A version of this article was last published on Sept. 7, 2005. It has been revised and updated.

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