Dispatch From Morningstar, Part 4


Dispatch From Morningstar, Part 4

At the Morningstar conference, an investing pro discusses the appeal of large-cap stocks.

Large cap. Those two words seem to be on the lips of everyone attending Morningstar's annual conference this week. (Read previous dispatches from the conference.) The question attendees want answered is whether large-company stocks, which have lagged their smaller brethren every year since 2000, are ready to resume market leadership. One pro who responded affirmatively was Eileen Rominger, chief investment officer for the U.S. Value team of Goldman Sachs Asset Management. Rominger said she likes large companies because they have competitive advantages, including being better able than small companies to move manufacturing offshore and being better able to extract concessions from suppliers.

Rominger offered some of her favorite stocks:

Ambac Financial (symbol ABK, recent price $81) provides financial guarantees, including municipal bond insurance. Selling at just 11 times analysts' 2006 earnings estimate, the stock looks like a bargain, she said. With a market capitalization of $8.6 billion, Ambac falls more into the mid-cap camp than the large cap sector.

Cisco Systems (CSCO, $20) and Oracle (ORCL, $14) both used to trade like high-flying growth stocks. But with both selling at about 15 times earnings estimates, the stocks look cheap. Both tech titans generate a substantial amount of free cash flow, Rominger noted.


EOG Resources (EOG, $69), a former subsidiary of Enron, explores for oil and gas in the U.S., Canada, offshore Trinidad and the United Kingdom's North Sea. One positive Rominger mentioned is that EOG doesn't have many reserves in the hurricane-prone Gulf of Mexico. The stock traded as high as $87 in the spring.

Pfizer (PFE, $23) suffers from the same malaise afflicting the rest of big pharma: pricing under pressure; competition from generics; and an uninspiring pipeline of new products. But the stock, which traded for as much as $50 in 1999, is in bargain territory at 12 times estimated 2006 profits. Rominger expects Pfizer to cut costs more aggressively and thinks it will handle generic competition better than most investors anticipate.

--Rachel Sheedy