Stock Picking in a World of Slow Growth: The Large-caps That Are Doing Better Than You’d Think

In Mitchell's experience, a lot of individual investors (or speculators rather) have a hard time considering investments in large-cap stocks because of the perceived inability of a big company to generate meaningful returns in a short period of time. This is unfortunate, because the stock market is full of great examples of large-cap wealth creation—the kind of wealth creation that every investor wants: big capital gains. In many cases, large-cap companies pay dividends as well and this is a real bonus to shareholders. Virtually all of the major railroad companies in North America are trading right at their 52-week or all-time price highs. That’s impressive—and it’s also a strong signal for the rest of the stock market.Speaking of railroad stocks (in yesterday’s article), virtually all of the major railroad companies in North America are trading right at their 52-week or all-time price highs. That’s impressive—and it’s also a strong signal for the rest of the stock market.

Here is a list of the major railway companies whose share prices are trading right at their highs: CSX Corporation (NYSE/CSX), Union Pacific Corporation (NYSE/UNP), Canadian National Railway Company (NYSE/CNI) and Norfolk Southern Corporation (NYSE/NSC). The entire group has been very strong and the outlook for both revenue and earnings growth this year is solid. Like I’ve said, strength in railroad stocks is a very important indicator for the broader market. You just can’t have a recovering economy without an improvement in load factors at railway companies. It’s one of the best (early) signals of strength in the economy and in the stock market.

If you want to hone your own stock market view, you’d benefit by reviewing the earnings results from the major railroad companies. I certainly will—and what I’ll be looking for mostly is the ability of these companies to raise their shipping prices without affecting demand. This is the single most important factor in my mind that will contribute to accelerating earnings over the coming quarters. We already know that business is going to be good. The question is: is business going to get better?

In my experience, a lot of individual investors (or speculators rather) have a hard time considering investments in large-cap stocks because of the perceived inability of a big company to generate meaningful returns in a short period of time. This is unfortunate, because the stock market is full of great examples of large-cap wealth creation—the kind of wealth creation that every investor wants: big capital gains. In many cases, large-cap companies pay dividends as well and this is a real bonus to shareholders.

If you pull up the long-term stock charts on many of the railroad companies mentioned above, you’ll notice that many of these stocks have been very strong performers over the last five years. Almost all stocks went down during the financial crisis, but railroad stocks recovered tremendously well. You can see in their stock charts that they have resumed their historical price trends. Just like farm land, they really aren’t making anymore rail lines and that makes the business model extremely attractive when the economy is growing.

I would include a major railroad company in a conservative, large-cap equity portfolio. Not only do the business metrics make sense, but also the long-term track record of most of these players is very hard to ignore. Just look it up and you’ll see the amazing price performance. All this from large-cap companies that pay dividends. As far as I’m concerned, the old economy is back with a vengeance.