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John Dorfman column: big stocks

Do you feel better owning big, solid stocks that are among the nation’s largest companies?

Many people do. So, once a year, I offer buy and sell ratings on the 20 largest stocks, even though I prefer the opportunities in smaller stocks.

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The 10 stocks I rated last year as buys achieved a 15.8 percent total return, including reinvested dividends, through Sept. 20, 2013. The four stocks on which I was neutral scored a 12 percent return. And the six I said to avoid returned 2.9 percent. Figures are total returns including dividends.

I have done nine columns in this vein since 2001. Over the nine one-year periods, my buys have averaged a 13.4 percent return, my neutrals 11 percent, and the stocks I said to avoid 8.8 percent.

Please note that the performance of my column recommendations is theoretical, doesn’t reflect taxes or trading costs, and should never be confused with results I obtain for clients. Also, past performance doesn’t predict future results.

Here are my latest rankings, with the largest stocks first:

 Apple Inc. ($425 billion). Buy.

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After the fall, Apple is a better value, selling for less than 12 times earnings. It boasts $42 billion in cash and short-term investments.

 Exxon Mobil Corp. ($390 billion). Buy. The largest US oil company sells for 11 times earnings and has debt less than 8 percent of equity. I’m nervous about the Mideast: Turmoil there would raise the price of oil.

 Berkshire Hathaway Inc. ($289 billion). Buy. This vehicle for financial genius Warren Buffett isn’t the major bargain it was a year ago. But it still looks good, especially when you factor in its stakes in other companies.

 Microsoft Corp. ($273 billon). Buy. It has a profit margin of 28 percent, which is spectacular. It sells for 13 times earnings, which is attractive. I think it will manage to make the transition to mobile devices.

 Johnson & Johnson ($253 billion). Neutral. I am getting a bit nervous about its valuations: 20 times earnings and 3.6 times book value (corporate net worth per share).

 Google Inc. ($247 billion). Avoid. It’s a great, innovative company. But the once-red-hot growth is slowing and I think that 26 times earnings is a bit too much to pay.

 Wal-Mart Stores Inc. ($247 billion). Avoid. I see nothing to get excited about here. The biggest US discounter is a mature company now.

 General Electric Co. ($245 billion). Avoid. GE makes great turbines and generators, but seems to lack an engine of growth right now.

 Chevron Corp. ($241 billion). Buy. This major energy producer looks cheap at 10 times earnings, and yields better than 3 percent in dividends.

 Wells Fargo & Co. ($227 billion). Neutral. With mortgage refinancing activity likely to be down in the next 12 months, I think the stock will just be a market performer.

 Procter & Gamble Co. ($217 billion). Avoid. People pay too much for steady earnings. I dislike the whole consumer staples sector and don’t recommend P&G at 20 times earnings.

 International Business Machines Corp. ($208 billion). Avoid. Revenue and earnings declined in the past year, and I don’t like the leveraged balance sheet.

 JP Morgan Chase Co. ($200 billion). Buy. As I predicted, the “London whale” scandal proved to be a blip. I think the same will happen with the investigation into the big bank’s activities in the electricity market. The stock sells for near book value.

 Pfizer Inc. ($192 billion). Buy. Major penetration in emerging markets is a strong point. I also like the 3.3 percent dividend yield.

 AT&T Inc. ($182 billion). Buy. There has been no growth in earnings lately, and very little growth in revenue. The 5.2 percent dividend yield is the big attraction.

 Coca-Cola Co. ($175 billion). Avoid. I consider 21 times earnings too much to pay for Coke’s moderate growth.

 Oracle Corp. ($158 billion). Avoid. The once-vaunted growth of the database leader has slowed to a walk. The stock is not cheap enough to compensate.

 Citigroup Inc. ($156 billion). Avoid. Mediocre profitability (with a return on equity last year less than 6 percent) doesn’t draw me, even though the stock seems cheap.

 Bank of America Corp. ($155 billion). Avoid. This bank has come a long way back from the financial crisis, but profitability is not yet impressive.

 Verizon Communications Inc. ($137 billion). Avoid. The balance sheet is so-so and will get worse as the company pays through the nose to acquire Vodafone’s stake in Verizon Wireless.

Disclosure: I own AT&T, Berkshire Hathaway, Exxon Mobil, Johnson & Johnson, JPMorgan Chase, Merck, Microsoft, and Pfizer for clients.

John Dorfman is chairman of Thunderstorm Capital in Boston.
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