After looking at the biggest 20 stocks in the US market, there are some that will continue to dominate and others that may lose their place in years to come, observes Roger Conrad of Personal Finance.
You know them. Chances are you buy their products. And if you own a stock mutual fund or exchange traded fund, odds are overwhelming they're in your portfolio, whether you know it or not.
They're America's biggest companies by market value. Reaching that rarified air means each one of them is a phenomenal business success story as well.
All have rewarded their shareholders with massive returns in the past. The question now is whether they'll continue to grow and add value for their shareholders.
Corporate history is littered with the bones of former colossi that, like ancient Rome, were eventually overrun. Only one member of the original Dow Jones Industrial Average is still a company today. More than half the current 30 companies were added in the 1990s or later.
There's little doubt some of today's top 20 will lose their lofty perches. Others will stay dominant for decades to come, and as such will reliably keep building wealth for investors. Here's our view of which companies will wax and wane in the years ahead.
Each of these companies owes no small measure of success to being able to make bigness work for them. Conversely, size stopped being an advantage for companies that have fallen from the top ranks over the years.
Some giants fall from grace due to management miscalculation. Despite operating one of the world's most dynamic engineering franchises, for example, General Electric (GE) was nearly dragged into bankruptcy in 2008 by its GE Capital division, the brainchild of once-lauded former CEO Jack Welch.
Technological change is another great equalizer. The US Big Three auto companies circa the 1980s still dominated global sales. But size lost its advantage when consumers demanded more efficient cars, allowing Toyota (TM) to storm the American market and reap the spoils. Today, Toyota's $148 billion market capitalization is nearly twice that of General Motors (GM) and Ford Motor (F) combined, but ironically it's the latter two that are gathering market share.
Not surprisingly, the five companies on the list from the Information Technology sector are at greatest risk to disruptive technologies. IBM (IBM) is a rare case of a tech sector leader that's been able to bridge generations to stay ahead with its products and services. The others have yet to be so tested, but continue to grow sales and markets.
Conversely, Chevron (CVX) and ExxonMobil (XOM) are least at risk to technological change. Their dominance stems from holding vast reserves of oil-still the most important commodity in the modern world-backed by financial power that bests that of most countries.
The rest of the companies on the list are somewhere between utility-like revenue security and tech-like volatility. AT&T (T) and Income pick Verizon Communications (VZ), for example, face a host of competitors in the US wireless and broadband communications industry, as well as sometimes hostile federal regulators. But their ability to spend $20 billion-plus a year on networks continues to widen their advantage.
As they become bigger in size, pharmaceutical companies such as Growth pick Johnson & Johnson (JNJ), Merck (MRK), and Pfizer (PFE) launch more treatments to build revenue streams. But they also face fierce global competition when their patents expire and regulatory threats from cost containment.
For Wells Fargo (WFC) and JPMorgan Chase (JPM), staying healthy during the financial crisis of 2008 moved them miles past the competition. The same is true for Berkshire Hathaway (BRK.A) in the insurance business. The debacle of 2008 also proved, however, that the biggest financials always fall hardest.
There's certainly nothing essential about what Coca-Cola (KO), Growth pick Philip Morris International (PM), and Proctor & Gamble (PG) sell. Rather, they depend on advertising to sell their American brand names to ever-changing generations of global consumers.
Buys and Sells
So which of these companies will stay on the Top 20 list? My best guess is most will for years. That includes GE, which appears to have rediscovered its roots just when the world needs engineering solutions more than ever.
The real question is whether they're the best place for your money now. The answer is some are, while others aren't.
Definitely on the buy list are Income picks Chevron and Verizon, as well as Growth recommendations Johnson & Johnson and Philip Morris. The quartet dominates markets and increased dividends a collective 10.6% over the past 12 months.
The highest-yielding stock on the list, AT&T is a buy as America's other dominant telecom. And ExxonMobil's global franchise makes it a buy as well.