Is Eaton Corporation (ETN) the Best Large Cap Stock To Buy Now?
We recently compiled a list of the 12 Best Large Cap Stocks To Buy Now. In this article, we will look at where Eaton Corporation (NYSE:ETN) ranks among the best large cap stocks to buy now.
Is the Next Bull Cycle Picking Up?
Analysts’ anticipation about the Fed initiating three rate cuts of 25 basis points each, starting in September, has become a hot topic in the current market. While some economic indicators show resilience, recent market fluctuations have raised concerns about deeper rate cuts being overestimated. Yet, a recession appears unlikely, and the steady economic growth suggests a cautious but positive outlook for the markets.
But the question is: why is a recession even being talked about? We discussed this earlier in another one of our articles, 12 Best Small Cap Tech Stocks to Buy, here’s an excerpt from it:
“Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.
Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.”
Binky Chadha, Deutsche Bank’s chief global strategist, joined CNBC last week to discuss what’s next for stocks, given the US elections — particularly the typical pullback seen in the month leading up to closely contested races, where markets often decline by 4% to 5%.
Chadha thinks that this trend, driven by uncertainty, prompts investors to seek protection against volatility, leading to a dip in stock prices. This decline usually hits its lowest point on election day, followed by a substantial rally if the election outcome is clear and resolves uncertainty. Historical instances, such as the Bush/Gore election, show that unresolved outcomes can exacerbate volatility, as seen with further market declines during that period.
Understanding market trends about elections is crucial, as delays can significantly impact investor confidence and overall market behavior. The current market is led by a significant rally in the S&P 500, reaching record highs despite challenges like high interest rates and geopolitical tensions. While election years typically see market weakness, the incumbency of both major party nominees may reduce uncertainty this cycle. However, potential volatility remains as the election approaches and corporate earnings are closely examined against high expectations, according to Chadha.
Chadha further talked about the Bush/Gore election and when a Supreme Court resolution seemed imminent, the market rallied. However, this was followed by a continued market decline. While relying on a single instance for broader conclusions is not ideal, this case reflects general market behavior. It’s important to recognize the prevailing positive trend, despite experiencing two pullbacks.
Chadha said that while the S&P 500 has shown unusual recovery dynamics, peaking with 26% year-on-year sales growth, this growth has slowed unsustainably over the past 2 years. As sales growth decelerates, concerns about potential downturns rise, leading to increased inquiries about negative sales growth in the S&P 500.
While Chadha acknowledges that S&P 500 sales growth has returned to pre-pandemic levels, implying stability, there’s also a decline in the labor market, particularly in private payrolls over the past 7 months. Such a mixed sentiment should be given into and used as a buying opportunity. With that, we’re bringing you a list of the 12 best large-cap stocks to buy now.
Methodology
For this article, we have defined large cap stocks as those trading between $20 billion and $200 billion. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Eaton Corporation (NYSE:ETN)
Market Capitalization as of September 13: $123.04 billion
Number of Hedge Fund Holders: 93
Eaton Corporation (NYSE:ETN) is a multinational power management company that offers a wide range of products and services, including power distribution, circuit protection, motor control, and energy storage, to improve energy efficiency, reduce costs, and enhance safety. It has ~ 85,000 employees and sells products to customers in 175 countries.
The backlog for the electrical segment of the business has surged to over $11 billion, a 4x increase from pre-COVID levels. It continues to impress investors with robust organic sales growth, expanding margins, and exceptional free cash flow generation. 93 hedge funds hold long positions in the company, as of June 30.
The data center and power generation/renewable projects take the lead in new project announcements, with these 2 project types representing ~40% of the announced projects in the last 12 months. The company now has 444 projects worth $1.4 trillion cumulatively. This is a 2x increase from last year, and the backlog for mega projects (announced value of $1 billion+) now stands at $1.6 trillion, up ~25%.
Revenue was $6.35 billion in the second quarter of 2024. This amount exhibited an 8.35% improvement from Q2 in the prior year. Electrical orders were up 9% and aerospace orders increased by 4%. The earnings per share were $2.73, an all-time record and up 24% year-over-year.
CEO Craig Arnold stated that the company anticipates significant growth in AI data centers, noting that currently only 5-10% of large businesses’ capital expenditures are allocated to AI data centers. Arnold emphasized that the backlog of data center construction, exceeding $140 billion, represents 8 years of business that Eaton Corporation (NYSE:ETN) is well-positioned to capitalize on in the near term. This makes it one of the top large-cap stocks to buy now.
Ave Maria World Equity Fund stated the following regarding Eaton Corporation plc (NYSE:ETN) in its first quarter 2024 investor letter:
“Eaton Corporation plc (NYSE:ETN) is an intelligent power management company. The company is a long-term beneficiary in the trend towards electrification, energy transition and digitalization. Eaton is also benefiting from unprecedented global stimuli such as the Inflation Reduction Act, Infrastructure Investment and Jobs Act, the Chips and Science Act and the EU recovery plan known as the NextGenerationEU.”
Overall ETN ranks 6th on our list of the best large cap stocks to buy. While we acknowledge the potential of ETN as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ETN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.