Three Industry Giants to Have on Your Side

When we were children, many of us used to play the "king of the mountain" game, where the strongest pushes everyone else off the hill.

It's not a bad game to play as adults, either, specifically when it comes to investing. Identifying companies with dominant positions in their industries is a recognized part of many investment strategies, such as the one used by Warren Buffett. Power comes to those who dominate, and power can be translated into strong corporate performance, strong profits and strong stock-price appreciation.

If you want to find out who is king of any industry mountain, look at market capitalization. For example, in the world of software, there's Microsoft (MSFT - commentary - Cramer's Take) and then there's everyone else. Compare Microsoft's $296 billion market cap to that of the second-largest software company, Oracle (ORCL - commentary - Cramer's Take), which comes in at $104 billion.

Among department and discount stores, there is Wal-Mart (WMT - commentary - Cramer's Take) and its $197 billion market cap, and then there's the rest of retail. The second-largest player is Target (TGT - commentary - Cramer's Take), and its market cap is only $58 billion.

There's an equally overpowering colossus in restaurants. Nobody comes close to the greatest hamburger slinger of them all: McDonald's (MCD - commentary - Cramer's Take). It has a market cap of $62 billion, while Burger King (BKC - commentary - Cramer's Take) and Wendy's (WEN - commentary - Cramer's Take) are each worth about $3 billion. The closest somewhat similar competitor to the Golden Arches is Yum! Brands (YUM - commentary - Cramer's Take), with its market cap of $18 billion.

This could be a good time to chow down on some McDonald's stock. That's because one of the computerized strategies I use, namely the one based on the writings of Peter Lynch, views McDonald's as a strong buy. Its price-to-earnings ratio is 21.36, and its growth rate (based on the average of the three-, four- and five-year historical EPS growth rates) is 23.02%, which produces a P/E/G ratio of 0.93. To find favor with the strategy, the P/E/G needs to be 1.0 or less, so McDonald's metric, which places growth in the perspective of price, fits the bill.

---

At the time of publication, Reese had no positions in any of the stocks mentioned, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.