The first-quarter earnings season has been a remarkable one for the S&P 500 and its cadre of large-cap stocks. More than 85% of the S&P 500's components have exceeded Wall Street's profit expectations.
However, much of the past quarter's growth was driven by monetary and fiscal stimulus. That's a problem, because the Federal Reserve will take its foot off the pedal at some point, and the president's latest initiative – to invest heavily in the nation's infrastructure – is no guarantee to pass in Congress.
In other words, many of the companies that excited Wall Street this quarter could be in for a rude awakening as the drivers of their growth dry up.
Investors should instead be focused on companies that can generate high upside potential on their own merits. And one way to target such growth (without sticking your neck out too far) is to focus on large-cap stocks. That's because large caps are capable of producing ample upside but also typically have better financial means to withstand market shocks compared to smaller-value stocks investors often chase for growth.
If you're looking for a place to start, consider these five large-cap stocks with high upside potential. We started with a universe of stocks that earn a Buy rating in the Stock News POWR Ratings system, which measures dozens of fundamental metrics to assess the quality of a stock. We then tapped the wisdom of the analyst community, as these researchers can provide in-depth insights into any company's current financial situation and future prospects. In this case, the pros expect each of these stocks to appreciate by at least 20% over the next 12 months or so.
Check them out.
Disclaimer
Data is as of May 19. POWR Ratings work on an A-B-C-D-F system. Potential upside based on analyst consensus 12-month price targets. Stocks listed in reverse order of potential upside.
Cadence Design Systems
- Market value: $34.2 billion
- POWR ratings: B (Buy)
- Potential upside: 24%
Cadence Design Systems (CDNS, $122.32) offers products and tools that help its customers design electronic products. It specializes in developing software, hardware and intellectual property that automates the design and verification of integrated circuits or larger chip systems.
Historically, semiconductor firms have used Cadence's tools, but the company is now providing solutions for the Internet of Things (IoT), artificial intelligence, autonomous vehicles and cloud computing, too.
A key growth catalyst has been Cadence's expanding product portfolio and frequent product launches. CDNS has invested in verification and digital design products so it can launch new products that address the needs of electronic and semiconductor companies. This expanding portfolio of products has put the company in front of new customer bases; for instance, autonomous vehicles have become an important growth area.
Indeed, CFRA analyst John Freeman cites "continued successful expansion into systems design/analysis, enhanced by recent acquisitions of Pointwise in system analysis and Numeca in fluid dynamics" as one of several reasons he recently upgraded shares from a mere Buy to Strong Buy.
CDNS is witnessing strong demand for its software from customers that provide datacenter servers, networking products, and smartphones. Its expansion into emerging trends such as IoT, augmented and virtual reality, presents a huge growth opportunity for Cadence long term as enterprises continue to spend on these emerging technologies.
Fueling the POWR Ratings' system's B grade (Buy) is a high Sentiment Grade of B. Eight of the 14 analysts covering the stock call it a Buy or Strong Buy, versus just four Holds and two Sells (and no Strong Sells). Meanwhile, an average price target of $151.98 implies roughly 24% upside from current levels.
A major draw of large-cap stocks is more reliable financials, and that's certainly the case for CDNS. The stock gets a Quality Grade of A thanks to a sterling balance sheet that features $743 million in cash and equivalents, which is more than twice its $347 million in long-term debt. Meanwhile, its most recent total debt to total capital of 12% was lower than the prior quarter's figure.
Strong cash flow allowed the company to continue its share repurchases, as CDNS repurchased $172 million in stock in the first quarter. See the complete POWR Ratings for Cadence (CDNS) here.
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Apple
- Market value: $2.1 trillion
- POWR ratings: B (Buy)
- Potential upside: 28%
Apple (AAPL, $124.69) is the king of U.S. large-cap stocks. You simply cannot buy a larger company on American exchanges, at the moment, than Apple, which currently is worth more than $2 trillion by market value.
The company recently reported earnings that destroyed analyst estimates. Its product revenue rose 62% year-over-year, driven by strong demand for its iPhone, iPad and Mac product lines. Mac computers also set an all-time revenue record. This was driven by the company's custom-built M1 chip that replaced Intel (INTC) processors in the Mac Mini and MacBook.
Apple's Services segment also delivered record results in the quarter. While the company's business runs through its flagship iPhone, its Services offerings – including cloud services, App Store, Apple Music, AppleCare and Apple Pay – are the new cash cow for the company. AAPL currently has more than 660 million paid subscribers across its total services portfolio. Its subscription-based video streaming, gaming services and news should benefit from its strong base of customers.
The company dominates the Wearables markets due to the growing adoption of the Apple Watch and AirPods. Interest in the Apple Watch has created an opening for the company to strengthen its presence in the health monitoring space. And the pandemic has been a boon to Apple Pay, which is being used in more than 150 stadiums, ballparks, and entertainment venues worldwide.
Still, the workhorse of Apple remains its iPhone, whose sunny outlook has UBS urging investors to buy the stock.
"UBS Evidence Lab recently surveyed over 7,000 smartphone users in the U.S., U.K., China, Germany, and Japan to gauge smartphone demand," UBS analysts write. "The three key takeaways from the survey pertaining to Apple are 1) iPhone 12-month purchase intent increased to 22%, the highest level in 5 years, 2) iPhone retention rate reached 86%, the highest level in seven years, and 3) Interest in 5G modestly improved, consistent with Apple's view of 'the early days of 5G ... with a lot of 5G upgrades will be in front of us.'"
AAPL has an overall grade of B, which is a Buy in POWR Ratings' book. Lifting that rating is a Sentiment Grade of A, which makes sense given strong analyst consensus around the stock. Eighteen of 24 analysts rate Apple surveyed by Stock News rate the stock a Buy, and a $159.74 average price target implies that within 12 months, Apple's stock will be worth 28% more than it is now.
And naturally, Apple is well-known for its bulletproof balance sheet, which earns AAPL a Quality Grade of B. As of the end of March, Apple had $69.8 billion in cash, compared with only $13 billion in short-term debt. Plus, AAPL has a sky-high return on equity of 110.3% and a return on invested capital of 41.4%. To see the complete POWR Ratings analysis for Apple (AAPL), click here.
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Qualcomm
- Market value: $148.1 billion
- POWR ratings: B (Buy)
- Potential upside: 31%
Qualcomm (QCOM, $130.66) develops and licenses wireless technology and designs chips for smartphones. The company is a big player in making chips for 5G phones, which makes sense as the company had previously provided chips for 3G and 4G networks. Its new chips enable 5G communication in smartphones, modems, and IoT devices that link to cars.
QCOM also has a patent business that collects licensing fees from other companies that want to use Qualcomm's wireless technology patents. For instance, QCOM has a chipset supply agreement with Apple, where AAPL will likely license the chips directly from Qualcomm instead of relying on original equipment manufacturers. The firm also has a new patent license agreement with Huawei.
Qualcomm should benefit from strong momentum in the handset space due to the ongoing shift toward 5G. And consumers are shifting. In 2021, 5G handsets are expected to see 150% year-over-year growth.
"We believe that Qualcomm has barely begun to monetize its significant intellectual capital and multigenerational lead in 5G technology," writes Argus Research analyst Jim Kelleher, who rates the stock at Buy. "As the 5G ramp moves from mainly infrastructure investment to the mass adoption of 5G handsets, we continue to look for a significant boost to revenue, margins, and EPS."
The company also has unveiled the first-of-its-kind automotive platform, Snapdragon Ride, which enables automakers to transform their cars into self-driving automobiles using AI.
Stock News' POWR Ratings system gives Qualcomm a B grade, indicating a Buy rating. Among the reasons to like QCOM are its strong growth prospects (reflected in a Growth Grade of B). Qualcomm's earnings are up 106.2% over the past year, and current-quarter estimates are for a whopping 94.2% year-over-year rise.
Value investors will like QCOM, too. The stock earns a Value Grade of B thanks to a forward price-to-earnings (P/E) ratio of 17.1 that's below the average of the S&P 500's large-cap stocks (22.6). Price-to-free cash flow (P/FCF) of 18.6 is below the industry average, as is a price-to-sales (P/S) ratio of 5.0.
Meanwhile, QCOM has an attractive 31% in potential upside based on analysts' average price target of $171.35 per share. Get Qualcomm's (QCOM) complete POWR Ratings analysis here.
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Generac Holdings
- Market value: $19.2 billion
- POWR ratings: B (Buy)
- Potential upside: 31%
Generac Holdings (GNRC, $301.60) designs and manufactures power generation equipment and other engine-powered products serving residential, commercial, oil, gas and other industrial markets. The company's offerings include standby generators and portable and mobile generators for a variety of applications. It also offers lighting, heating, pumps and outdoor power equipment.
The company can expand the power range for stationary generators through a configuration called Modular Power Systems. This technology can combine the power of several smaller generators to produce the output of a larger generator. This provides customers a cost-effective way to scale capacity. The market for this technology offers significant untapped potential for GNRC to capture more market share.
Generac is also benefiting from secular growth drivers such as climate change and aging power infrastructure. For instance, GNRC's products are well suited to accelerate the transition from fossil fuel to clean natural gas. Its low-cost natural gas generators have helped the company penetrate the standby generator market.
GNRC receives a Buy rating from the POWR Ratings system. That's led by a Growth Grade of A. For instance, in the current quarter, the pros are looking for a massive 64.3% year-over-year jump in profits on the back of a 57.3% rise in revenues. Moreover, the company has a strong history of earnings, revenue, and EBITDA growth highlighted by an average earnings growth rate of 48.4% over the past five years.
The "smart money" loves the stock, too, reflected in a Sentiment Grade of A. Currently, 10 analysts cover the stock, and eight rate it a Buy. And the pros' average price target of $395 per share implies 31% potential upside from current levels.
Argus Research analyst Bill Selesky has a slightly lower price target of $390 but still views GNRC as a Buy, saying that he expects "the positive sales, earnings and stock price momentum to continue for this well-positioned company." Get the full POWR Ratings for Generac Holdings (GNRC) here.
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Vertex Pharmaceuticals
- Market value: $55.4 billion
- POWR ratings: B (Buy)
- Potential upside: 33%
Vertex Pharmaceuticals (VRTX, $214.04) discovers and develops small-molecule drugs that treat serious diseases, with a specialization in cystic fibrosis. Its therapies are the global standard of care. VRTX's key cystic fibrosis drugs include Kalydeco, Orkambi, Symdeko and Trikafta.
The large-cap biotechnology stock also focuses on type 1 diabetes, influenza, inflammatory diseases, pain and other rare diseases.
VRTX's leading cystic fibrosis drugs, collectively, are approved to treat approximately half of the 80,000-plus people with cystic fibrosis in North America, Europe and Australia. Trikafta also has the potential to treat up to 90% of cystic fibrosis patients. The company's drugs should continue to dominate the market due to their disease-modifying potential, consistent use by patients, and not a lot of competition. The drugs also have very lengthy patents, which can protect against generics.
Vertex's non-cystic fibrosis pipeline is impressive as well. The company is exploring areas such as sickle cell disease, AAT deficiency and beta-thalassemia. VRTX also has been co-developing a gene-editing treatment with CRISPR Therapeutics (CRSP) targeting sickle cell disease and thalassemia. VRTX is actually buying the majority rights to this gene-editing therapy.
Vertex's stock has an overall grade of B, which is a Buy rating in Stock News' POWR Ratings system. Particularly attractive at the moment is its valuation, which receives a Value Grade of A. Chalk that up to a below-average forward P/E of 19.0, as well as a P/S of 8.8 and price-to-book (P/B) ratio of 6.2 that, while high in a vacuum, are well below industry averages.
Also attractive is a solid balance sheet. VRTX has a very high current ratio of 4.4, which suggests the company has more than enough liquidity to handle short-term needs.
And the ceiling is quite high compared to other large-cap stocks. Analysts have a consensus price target of $285.55 on the stock, implying more than 33% returns over the next 12 months. Get Vertex's (VRTX) complete POWR Ratings analysis here.
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