With the stock market soaring this summer, you likely read a lot about a number of mega-cap companies: the largest companies in the investment universe as measured by market capitalization. But when it comes to investing, bigger may not always be better.
While the exact thresholds change with market conditions, mega-cap companies generally have market capitalizations above $200 billion. The so-called FAAMG stocks (Facebook, Apple, Amazon, Microsoft, and Google) are good examples, but there are many others.
The total number of mega-cap stocks varies with market conditions, but there are generally 25 to 30 in the United States. Bank of America, Berkshire Hathaway, The Walt Disney CO., and Johnson & Johnson have also made the list. The massive value of these companies can attract investors who think the businesses are too big to fail. Mega-cap companies tend to have recognizable brands as well as steady revenue, earnings, and dividend streams. These qualities appeal to investors who are seeking less volatility than smaller stocks generally offer.
But are mega-caps necessarily good investments because of their size? To answer that question, you may have to look deeper.
While each of the FAAMG companies was initially a single business, for example, they are now much more.
Amazon began as an online retailer of books, but is now in the business of cloud-based web hosting and even owns brick-and-mortar grocery stores. Google started as an internet search engine, but now has a mobile phone operating system and even a self-driving car enterprise.
Diversification in a business model is good, but it can present challenges. No company can succeed at everything. So, it takes an experienced analyst to determine if size is good or bad.
The moral of the story: Bigger may or may not be better. When analyzing mega-cap stocks like these, an investor should look beyond size and consider many other factors.
We can help you navigate these factors to determine what investments are best for your current and future financial goals.