Mega Cap Stocks: What They Are and How to Invest

Key Points

• Mega-cap stocks must have a $200 billion market cap and are the world's largest public companies.
• Only a handful of mega-cap companies exist, but they're located in a diverse range of sectors.
• Mega caps are considered some of the safest stock investments thanks to their stability and willingness to return profits to shareholders through dividends.

Are you thinking of investing in mega-cap stocks? If so, you'd be joining a long line of investors who have parked their capital in massive company stocks for years, decades and generations. Mega-cap stocks are some of the most well-known and influential firms on the planet, and you can find them in practically every market sector. 

Mega-cap stocks are some of the safest companies to invest in since they have long business histories and the financial strength to withstand bear markets or economic recessions. But investors must still perform risk and reward analyses for determining if mega-cap stocks suit their portfolios.

What is a Mega Cap?

So what is mega-cap stock anyway? One of the most common methods of dividing companies is through a market cap, which combines the value of all outstanding shares to form a single number. For example, let's look at Microsoft Inc. NASDAQ: MSFT and its current market cap of $1.8 trillion. To get the $1.8 trillion, you multiply the current share price by the number of outstanding shares (in this instance, a $243 share price and a total of about 7.44 billion shares).

According to FINRA, a mega-cap stock is any company with a market cap of over $200 billion. A company with a market cap between $10 billion and $200 billion is considered a large-cap stock, so mega-cap stocks comprise only the most massive publicly traded companies. You won't find any startups or new companies on the mega-cap stocks list; these are almost entirely large, old and far-reaching companies.

Mega Cap Companies Explained

A firm must exhibit staying power to become a mega-cap company. Mega-cap stocks grow slowly — the company usually needs several decades of consistent growth to reach the mega-cap territory.

Fewer mega-cap stocks exist at a given time than small or mid-cap stocks. You'll likely find less than 40 or 50 companies matching the mega-cap definition worldwide. Most of these companies reside in the United States, but some, like Alibaba Group Holdings Limited NASDAQ: BABA and AstraZeneca plc NASDAQ: AZN, are outside American borders.

Investors like mega-cap stocks because they are often predictable and less risky than other types of assets. Mega-cap stocks tend to have low volatility and high dividends, making them a preferred vehicle for institutional investors. However, these stocks do have their limitations, especially for risk-seeking investors.

Limitations of Mega Cap Stocks

Mega-cap stocks are usually considered safe and conservative investments, but that won't be appealing to all types of investors or traders. Here are a few of the downsides of buying mega-cap companies: 

• Slower growth: Many mega-cap stocks like Amazon.com Inc. NASDAQ: AMZN and Alphabet Inc. NASDAQ: GOOG were some of the most successful growth stocks in a past life. But once a company reaches mega-cap status, investors must temper growth expectations. A small-cap stock can grow into a mid-cap stock quickly. But doubling from a $500 million market cap is much easier than doubling from a $500 billion market cap. Many mega-cap stocks have maxed out on growth potential and are more concerned with returning capital to their shareholders.
• Limited return potential: One of the reasons traders and investors turn to small and mid-cap companies is the potential for exponential returns. For example, a small drug manufacturer can double or triple quickly if it has successful trials and brings a product to market. While mega-cap stocks can still earn consistent returns, they likely won't produce life-changing stock gains quickly.
• May underperform in bull markets: Mega-cap stocks have heavy spots in institutional portfolios, so while shares are plentiful and liquid, many last changed hands a long time ago. These are true buy-and-hold stocks whose proponents will own them for decades, not months or years. As a result, volatility is low, which means these companies can underperform in bull markets where riskier assets have more appealing returns. Buying a bunch of mega-cap stocks is like buying an index fund; you'll get standard market returns, but outperformance won't always be on the table.

Features to Look for in Mega Cap Stocks

Now that we've answered the question of what is a mega-cap stock, it's time to discuss the features that make them appealing. Use the following characteristics to help differentiate which mega-cap stocks to add to your portfolio:

High Gross Margins

Gross margins are a financial metric that measures how much each dollar earned returns to the company as profit. High revenue isn't always an indicator of healthy sales if marketing and development costs eat into the company's bottom line. When gross margins are low, the company generates less profit per dollar of revenue than one with high gross margins. Looking at margins is an excellent way to determine which companies can keep expenses and bloat down.

Consistent Dividend Growth

While some mega-cap stocks live in the growth-crazy tech sector, many are in the healthcare, financial or consumer staples sectors. One thing to look for in these companies is dividend growth. A company that consistently raises its dividend is attractive to investors looking for annual income and capital gains through stock price appreciation. Companies that raise dividends for 25 straight years are known as Dividend Champions, which makes them highly appealing to institutional investors and retirement savers.

Low P/E Ratio

Not every investor considers the P/E ratio a useful metric, but it's a good one to monitor for mega-cap stocks. Low P/E rates are usually a sign of a fair valuation; high P/E rates could mean the company isn't earning enough profit to justify its valuation.

Quality Management and Executive Team

A good management and executive team are crucial for any stock. Still, mega-cap stock executives are often synonymous with their companies, like Jeff Bezos at Amazon or Steve Jobs and Tim Cook at Apple. Company leadership at the mega-cap level is important since these companies often need to move faster than their smaller competitors. Quality management will keep firms ahead of the curve. 

How to Add Mega Cap Companies to Your Portfolio

Here's how to add mega-cap stocks to your investment portfolio.

Step 1: Open a brokerage account.

You won't need a lot of bells and whistles in your brokerage account to purchase mega-cap stocks, so select one that best fits your needs and goals as an investor. Don't overthink it — every major broker will have mega-cap shares available.

Step 2: Map out your ideal portfolio.

Plan out your portfolio in advance. Are you looking to add stocks from a specific sector, like healthcare or tech? Or do you want to diversify across industries or sectors? There's no right or wrong answer here, so pick out companies that fit your risk profile and investment goals.

Step 3: Purchase stocks based on your investment goals.

Once you've developed a plan for your portfolio, locate the stocks you want to own and purchase them. You can do this one of two ways: purchase a portfolio of stocks with all your available capital or ease into your positions over days or weeks. The most patient investors use dollar-cost averaging to construct portfolios affordably and efficiently.

Step 4: Hold stocks for the long term.

Mega-cap stocks aren't meant for short-term trading since volatility is often low, and these companies go for long-term stability. If you're looking to invest in mega-cap stocks, you should adopt a "buy and hold" mentality (especially if you want the preferential tax treatment given to long-term capital gains!).

Example of a Mega Cap Company

Let's go with one of the oldest companies in the world for this example: JPMorgan Chase and Company NYSE: JPM. Named after pioneering banker John Pierpoint Morgan, JPM has over 200 years of banking experience, with roots going as far back as 1799. Currently, JPM has a market cap of more than double the $200 billion required for mega-cap status and is the largest bank in the entire world.

JPMorgan Chase has survived bear markets, recessions and financial catastrophes. Its current iteration is a conglomeration of smaller banks, such as Chase Manhattan, Bear Stearns and Washington Mutual. JPMorgan Chase provides retail, business and investment banking services to a global array of clients.

Safety Comes With a Cost

If you're looking for exponential stock returns, you may need more than mega-cap stocks. Mega-cap companies are some of the oldest and most stable firms you can find, but that security comes with some downsides. If you don't mind taking on additional risk, you can find companies that will perform better in the short term. 

However, suppose you're looking to build a reliable portfolio of the strongest companies and aren't trying to beat the market. In that case, a portfolio of mega-cap stocks is a great way to maintain purchasing power and increase your wealth over long time horizons. Mega-cap stocks are the foundation of most retirement and index funds and usually have a place in every investor's portfolio.

FAQs

Here are a few of the most commonly asked questions regarding mega-cap companies.

What are mega-cap stocks?

Mega-cap stocks are the largest publicly-traded companies in the world. A company must have a total market cap of $200 billion or more to be considered a mega cap. Mega-cap stocks are usually some of the oldest and most stable companies in their respective industries.

Is Apple a mega-cap stock?

Yes, Apple Inc. NYSE: AAPL is one of the largest companies in the entire world, with a market cap of over $2 trillion.

What are some mega-cap companies?

You can find mega-cap companies in most sectors of the market, such as JPMorgan Chase in the banking sector, Amazon and Google in the tech sector, Johnson and Johnson Inc. NYSE: JNJ and UnitedHealth Group Inc. NYSE: UNH in the healthcare sector and the Coca-Cola Company NYSE: KO and Home Depot Inc. NYSE: HD in the consumer staples sector.