Many investors like to invest in large cap growth stocks because it gives them the security of a large company combined with the potential for capital appreciation because of the growth nature of the business.
But make sure that the large cap growth stocks that you evaluate, fit your growth investing strategy, based on your needs and your strategy. You may find that you favor a value strategy vs. a growth strategy, or perhaps you find investing for income vs. growth more your style. There is no wrong answer as long as you are taking a measured and balanced approach to your investments.
However, today, we are going to take a close look at a large cap growth investing strategy for 2 types of investors.
Large cap stocks are generally defined as companies with a market capitalization greater that $10 billion. (market caps equal the share market price times the number of shares outstanding). Given their larger size, large cap stocks tend to have a share price that is less volatile than smaller companies. This makes them attractive, especially when markets are volatile to the downside.
A growth stock is a company whose revenues and profits are growing faster that the market averages.
So, when you combine the previous two paragraphs, you get a large cap growth stock. This is a company with a market capitalization greater than $10 billion who also is growing faster than the market as a whole.
Many large cap growth stocks are companies whose products you use every day. And given that there is such a technology boom occurring these days it is not surprising that many of the large cap growth stocks are in the technology sectors. Examples include companies like Alphabet (Google), Apple, Facebook, Microsoft, etc.
It all starts with your growth investing strategy.
The first question to answer is whether investing in growth stocks is right for you. Many investors prefer to invest in value types of stocks that for some reason trade well below their historical valuations.
Businesses like CVS or Walgreens fall into the value category these days. Top line sales have stagnated and as a result they are both trading at historically low valuations. Value investors see that as an opportunity, compared to growth investors who would stay away because there is no growth.
So, most investors need to determine whether they are more comfortable investing in growth stocks vs value stocks before they move on to the second question. The second question is do they prefer large cap stocks vs small cap stocks?
Some investors prefer investing in small businesses that they see having great potential. Or there are other more conservative investors that prefer to see a business model proven before investing. You might lose some of the upside by investing a little later, but you are likely to sleep better at night investing in large cap stocks that are more proven.
In the end all but the most conservative investors will have at least a small part of their capital invested in large cap growth stocks because they are proven leaders that should continue to grow their businesses in the future.
So be sure to address the question of large cap growth vs value stocks head on early in your decision making sure that you have a plan as you get started buying stock in the stock market.
One of the best large cap growth stocks for the more conservative investor has to be Microsoft (ticker MSFT).
Microsoft has so many ways to win. They have many well-known brands that are still growing and taking market share from their competitors. These brands include Windows software, LinkedIn, and Xbox. And their fastest growing division, Azure, is not even a household name yet. Azure is Microsoft’s infrastructure as a service division that is competing very successfully with Amazon’s AWS division.
And Microsoft is still a growth company. Even with a market capitalization of $1.7 trillion, they grew revenue 17% in the latest quarter, which is amazing for a business their size.
Microsoft has been led since 2014 by chief executive Satya Nadella, who is well respected in the industry and by investors.
You would think a company of this size, still growing at these rates might have a balance sheet that is highly leveraged, but nothing could be further from the truth. Given their incredible profit margins, they have more than $100 billion in cash and short-term investments, which is more then enough to continue raising their dividend and investing in whatever long term strategy they decide to pursue.
Microsoft’s stock price has held up well with the recent sell off in some technology stocks, pulling back just 6%, while many technology stocks have tumbled much more.
We are not sure what Microsoft’s stock price will do tomorrow or next month, but over the long run we suspect the most conservative growth investors will be pleased with the results.
The “war on cash” in the United States has been going on since the 1990s, as consumers elect to pay via digital transactions using their debt or credit card instead of paying with paper currency.
And some foreign countries may be behind the United States in terms of the “war on cash”, but they are catching up fast.
This move away from using paper currency is why PayPal (ticker PYPL) has been so successful operating a technology platform that enables digital and mobile payments for consumers and merchants around the world.
We believe that PayPal is one of the best growth stocks because these trends should continue for many years with the business being able to do quite well as a result. We are classifying PayPal as suitable for more aggressive investors not because of any big risk to the business. But more because its stock price is a bit more volatile despite the size of the business.
PayPal definitely fits the definition of a large cap stock with a market cap of greater that $250 billion. It definitely meets the definition of a growth stock, having grown revenue 22% in 2020.
PayPal is led by the very well-respected Dan Schulman who has been chief executive officer since 2015.
They should continue to do well in the years and decades ahead, rewarding growth investors nicely over the long run.
For no company specific reason, PayPal’s stock price has pulled back 25% during the recent technology sector sell off. Now is a good time to buy a few shares for a long-term growth portfolio.
Summary
Growth stock investing can be quite rewarding for conservative and aggressive investors, but it is important to know your growth investing strategy before investing.
Investing in large cap stocks can be a good strategy because, given their size, their stock price tends to be more stable than small cap stocks.
Use the two examples of Microsoft and PayPal to help you get started with your research on growth stocks.
Invest small increments at first until you become more comfortable with the businesses you are investing in.
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