The New Fortune 500

Which Fortune 500 Companies Are Worth Buying Now

April 23, 2009

Fortune magazine is out with its updated list of top 500 companies in the country. The list is a bit of a misnomer. Remember, large revenue doesn't always equate to success and profits for shareholders. A prime example of this is the dot-com boom when excessive spending ensured that no matter how high revenues grew, profits were mostly non-existent.

But certainly being large does have its advantages. Indeed, some people go so far as to only invest in Fortune 500 companies, so the list holds interest for investors.

The question is which Fortune 500 companies are worth your money? Clearly, investing in the biggest companies is not right approach. Had you bought General Electric (GE), Ford (F) or General Motors (GM) ten years ago, you would be looking at significant losses today. At the end of the day, huge revenues only translated to huge losses as poor financial decisions pushed all three of these companies to the brink of bankruptcy.

While the economy and an epic financial crisis contributed to these stocks' poor performance, the results clearly show you have to be more selective in your investment decisions. I prefer a fundamental approach, examining each stock on its own merits.

Here are my thoughts on the top 10 stocks of the new Fortune 500:

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1. Exxon Mobil (XOM)

Up until the middle of 2008, oil prices were on the rise. The boom in crude resulted in the large vertically-integrated oil company becoming a veritable printing press of cash. At the top of the Fortune 500 list is Exxon Mobil (XOM). The good news is that the huge revenues have indeed translated into fat profits for shareholders. Unfortunately for investors, oil prices have collapsed, and demand for crude has been shrinking due to economic contraction. XOM may not be at the top for long. I rate the stock a D or sell.

2. WalMart (WMT)

For much of the past decade, discount retailing giant WalMart (WMT) saw its competitive position eroded due to inroads by Target (TGT) and other upstart retailers. The good news is that the company stuck to its focus on low prices. Such a strategy was timely, considering the pressures on consumers during a very strong recessionary period. As a result, WalMart has reinforced its competitive position and has fared relatively well compared to its peers. That said, the economy is still weak and likely to be stressed for some time. I am still cautious on the future. My rating on WMT is a C or hold.

3. Chevron (CVX)

No surprise here that Chevron (CVX) would be in the top 3 of the Fortune 500. This giant oil company is racing Exxon Mobil (XOM) for the top spot on the list. A retreat in oil prices resulted in shares of CVX losing value over the last six months. The easy days of fast money in oil appear to be over. Size then, should matter, as CVX can better deploy its cash flow to support future exploration and development. But it will be some time before the global economy heals. I rate CVX a C or hold as we wait for conditions to stabilize across the globe.

4. ConocoPhillips (COP)

Close behind Chevron is ConocoPhillips (COP). Investors in COP have to be disappointed that in a year of unprecedented moves in oil prices, COP managed to lose money. Write-downs of assets were the main culprit, and though these are only one-time events, the results reflect poorly on management's strategy of growth via acquisition. Warren Buffett called a recent investment in COP a big mistake. With the gravy train of high oil prices a mere memory, I expect COP to slip in the Fortune 500 rankings over time. I rate COP an F or Strong Sell.

5. General Electric (GE)

The great Jack Welch's legacy at General Electric (GE) is that the company is a global behemoth with gobs of revenue. Now ranked number five on the Fortune 500 list, General Electric finds itself in a fight for survival. Could it be that all that revenue growth was smoke and mirrors? At a minimum, it would appear that the company's finance unit may have been funding loans for purchases that could not be made otherwise. As those loans collapse, GE has been forced to endure massive write-downs. There are no sacred cows in this fight: GE's dividend was cut. It will be a long road before GE sees the end of tunnel. I rate the stock an F or Strong Sell.

6. General Motors (GM)

The auto industry as we know it is dead. The collapse in auto sales, combined with massive legacy costs for employees, crippled the industry. Paraded in front of Congress begging for survival, the big three automakers have fallen far quickly. The appearance of General Motors (GM) on the list of Fortune 500 companies may be a final curtain call. The company claims that bankruptcy is not an option. The government disagrees and is willing to support warranties should court-based reorganization be required. Put it all together and we have a train wreck for common shareholders. I rate GM a D or sell.

7. Ford (F)

The big winner in the auto sweepstakes will be Ford (F). The company has yet to take a dollar of government funding and is much better positioned relative to its domestic competitors. Even better: The company appears to be the closest to bringing to market products that fit the new agenda of alternative energy and fuel conservation. If indeed one or two automakers fail, look for F to be left standing. Eventually car sales will recover and the survivors will thrive. I rate the stock a B or buy.

8. AT&T (T)

Ma Bell has parlayed its monopoly standing and subsequent break-up into a top spot in the Fortune 500. The only problem for AT&T (T) is that the company still acts like a dinosaur that lacks innovation. For many years, while other rivals have performed better on an operating basis, T was lacking a vision. That is, until its partnership with Apple Computer (AAPL) and its game-changing product the iPhone. That deal alone reversed years of ineptitude. Unfortunately for AT&T, all good things must come to an end, as the contract with AAPL is set to expire. Until that issue is resolved, I rate T a C or hold.

9. Hewlett Packard (HPQ)

Computers are big business and generate huge amounts of revenue. One of the biggest companies in the computer selling business is Hewlett Packard (HPQ). Do computers have the same appeal they did while HPQ was clawing its way to the top? Not exactly. The device is becoming more of a commodity. Which means it's not so easy making money for shareholders by selling computers. In the case of Hewlett Packard, being the largest may have its benefits. As profit margins are thin, huge sales are needed to drive growth. The problem for HPQ in the short term is the economy. Until we see a recovery, requisite sales will be less than needed for maximum profit. I rate HPQ a C or hold.

10. Valero Energy (VLO)

The oil refinery business is very challenging. Even though there have been no new refineries built in the US in some time, the existing refineries have had a tough go of it on the profit front. The huge volatility in oil prices in 2008 was disastrous for the industry. Though sales are high, the price paid for crude and the lower selling price translated to smaller profits for the industry. Valero Energy (VLO) is one of the leaders in the space as evidenced with its top 10 placing in the Fortune 500, but that does not mean investors should own the stock. I expect the refinery business to remain challenging, even with lower oil prices. I rate VLO a D or sell.

In today's market, having a top 10 spot on the Fortune 500 list is no ringing endorsement for shareholders. There is only one stock on the top 10 that I currently recommend, and 5 of the 10 are clear sells. You might even say that blindly following a big-name list is a sure-fire way to underperforming the markets these days.