Five Sleepy Big-Caps Set to Wake Up

Price is everything when buying stocks. It doesn't make sense to allocate capital to companies when their shares are overvalued, even if they are elite, world-class businesses.

I panned five premier big-cap stocks in a 2001 column because their valuations were stretched: General Electric (GE - commentary - Cramer's Take), Microsoft (MSFT - commentary - Cramer's Take), Wal-Mart (WMT - commentary - Cramer's Take), Intel (INTC - commentary - Cramer's Take) and Home Depot (HD - commentary - Cramer's Take). Since then, the five are down 10% on average.

In the same column, I highlighted five mid-cap companies that I thought had the potential to perform well for the next several years: Textron (TXT - commentary - Cramer's Take), Office Depot (ODP - commentary - Cramer's Take), Whirlpool (WHR - commentary - Cramer's Take), Liz Claiborne (LIZ - commentary - Cramer's Take) and Manpower (MAN - commentary - Cramer's Take).

All five easily outpaced the 13.7% return of the S&P 500 from then to now. The group as a whole is up 75%, with returns ranging from 32% to 158%.

Reversal of Fortune

I believe the tables are about to turn. My five frogs of 2001 are ready to become princes.

The underlying businesses at GE, Microsoft, Wal-Mart, Intel and Home Depot have grown in value by roughly 50% since 2001; coupled with their 10% decline in prices, these blue-chips have morphed from overvalued to undervalued.

It is particularly easy to see the undervaluation in the stocks of Wal-Mart and Home Depot. These businesses aren't difficult to model because their operating metrics have minimal oscillation. If you think a P/E multiple of 18 is fair for these premier companies, then you should be able to calculate the same 2010 value as I do: $83 a share for Home Depot and $87 for Wal-Mart. Currently, Home Depot trades at $42 and Wal-Mart at roughly $45.

Pockets of excess exist in every market cycle. While big-cap growth was excessively valued a few years ago, it's clearly not now.

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At time of publication, Alsin and/or ACM was long Home Depot, Wal-Mart and Microsoft, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.