Lesson 24 of 43 (Large Cap Investing): A Step-by-Step Guide to Picking the Best Large Cap Stocks

  1. Most investors consider a large cap company to be any stock with a market cap above $10B.
  2. Large cap stocks tend to be more stable, less risky, and better able to handle challenging bear markets.
  3. Large cap stocks tend to be well-researched and understood by analysts and investors alike, which makes it difficult to find hidden gems.
  4. We walk through a step-by-step guide to finding the best large cap stocks, including screenshots and direct links to a stock screener that’s pre-filtered for high-potential large cap stocks.

Having just dug through the haystack to find the best small cap needles, now it’s time to reverse course and focus on the giants in the market. 

Today we’re going to cover four important questions about finding the best large cap stocks:

  1. What are large cap stocks?
  2. What should you know about investing in large cap stocks?
  3. Which large cap stocks perform best?
  4. How do you find the best large cap stocks to buy? (A step-by-step guide)

What Are Large Cap Stocks?

A large-cap stock is defined as a company with a market cap between $10B – $300B.

A mega-cap stock is defined as a company with a market cap of $300B and above.

For the purposes of this lesson, we’ll consider large caps to be any company with a market cap above $10B.

What Should You Know About Investing in Large Cap Stocks?

Large caps are the biggest companies trading on the market. They’re often (but not always) fairly mature companies that have been around for quite a while.

Their large cap status usually means they already have a product that’s found a wide market of interested customers.

As we saw in our previous lesson on small cap stocks, large caps have historically performed more poorly than small caps.

However, the flip side of the coin is that large cap stocks tend to be more stable, less risky, and better able to handle challenging bear markets.

Large caps are also more likely to pay a dividend to shareholders. 

Which Large Cap Stocks Perform Best?

Similar to our last lesson on small cap stocks, we think of large caps as the pond and undervalued / high quality / growing / profitable / dividend companies are the fish we’re trying to catch.

It’s not about finding the biggest large-cap companies. That strategy will offer very poor returns.

Instead, it’s about finding the most attractive companies within the pond of large cap stocks.

However, in contrast to the enormous pool of thousands of small cap stocks, there are far fewer large caps on the market to pick from.

As of today, there are only 680 large cap stocks vs. 3,492 small cap stocks!

While these companies have already “passed the test” of growing large enough to be considered large caps, there are far fewer stocks to choose from.

Plus, they tend to be much better researched and understood by analysts and investors alike, which makes it difficult to find hidden gems.

When looking to find the best large cap stocks, we use similar criteria to our small cap stock screen. We want to find companies that are:

  1. Profitable and growing
  2. Modestly undervalued (definitely not overvalued)
  3. Low volatility (a stable and steady stock)
  4. Not carrying excessive amounts of debt

Put simply, we’re looking for large, profitable, growing companies that are stable and modestly undervalued.

Let’s see how we can break that down into a FinViz stock screen.

How Do You Find the Best Large Cap Stocks to Buy? (A Step-By-Step Guide)

In order to find a short list of the best large cap stocks for your personal research, we designed the following screen.

We adjusted many of the criteria (see below) to try and focus on just the best candidates.

When we first designed the screen, it yielded 59 total results, which could easily be narrowed to under 20 by tweaking each criteria.

Below is the full screen and you can see it yourself by clicking here.

In order to find profitable large cap companies that are growing sales and earnings we applied these criteria:

  • EPS growth past 5 years = positive
  • EPS growth next 5 years = positive
  • EPS growth this year = positive
  • EPS growth qtr over qtr = positive
  • EPS growth next year = positive
  • Sales growth qtr over qtr = positive
  • Sales growth past 5 years = positive
  • Net profit margin = positive

In order to filter out stocks that are overvalued, we applied three important valuation criteria:

  • P/E is under 35
  • Price / Free Cash Flow is under 40
  • Price / Sales is under 5

We set a beta of less than 1.5. This still allows through stocks that are up to 50% more volatile than the overall market. If you’re looking for more stability in your large cap stocks, you could require stocks with a beta of less than 1.0 (or even less than 0.5).

And finally, to make sure the company isn’t carrying excessive debt, we required the long-term debt / equity ratio to be under 1.0.

If you want to collect dividend income from your large cap stocks, you can require a yield of greater than 1%. In our screen, adding this requirement only screened out 11 stocks, leaving us with 48.

If you want to focus on high dividends, requiring a dividend yield of 3% or greater narrowed the list to 15 results, which included Best Buy (BBY), Bank of Montreal (BMO), Huntington Bancshares (HBAN), and Royal Bank of Canada (RY).

Please keep in mind the results will look different as stock data changes and you tweak the metrics to your liking.

As with our previous walkthroughs, we’d suggest you adjust the metrics to your liking, dialing up the criteria that align with your investment strategy.

Lesson Summary (Large Cap Investing): A Step-by-Step Guide to Picking the Best Large Cap Stocks

When it comes to investing in large cap stocks, many of the same strategies we use in other areas (such as small cap stocks, growth stocks, and value stocks) all apply here.

The difference is we’re “fishing” in a much smaller pond of companies that have grown quite large.

While this reduces the number of choices available, focusing on large cap stocks acts as a natural “pre-filter” that narrows our universe to large, stable companies that have already found a sizable market for their products.

Here are the major takeaways from our lesson on large cap stocks:

  1. Most investors consider a large cap company to be any stock with a market cap above $10B
  2. Large cap stocks usually already have a product that’s found a wide market of interested customers.
  3. Historically, large cap stocks have performed much more poorly than small cap stocks.
  4. However, the flip side of the coin is that large cap stocks tend to be more stable, less risky, and better able to handle challenging bear markets.
  5. Whereas there are thousands of small cap stocks to pick from, there are far fewer large caps on the market.
  6. Large cap stocks tend to be well-researched and understood by analysts and investors alike, which makes it difficult to find hidden gems.
  7. To find the best large cap stocks, look for large, profitable, growing companies that are stable and modestly undervalued.
  8. You can access the large cap stock screen here.
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Author

Todd Lincoln

Author

Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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