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What you can learn about diversification from the ten most profitable companies of the Fortune 500

by , 03 September 2015

I often get questions about portfolio diversification.

What percentage of financial shares do you put in your portfolio? What percentage tech shares? How many resource stocks?

Whilst there are many ways to determine this, and many forecasts we can make there's one easy way to look at the basic composition of your portfolio…

Look at the ten most profitable companies in the world.

The Fortune 500’s ten most profitable companies

The ten most profitable companies in the world will tell you two things:
  1. What the most profitable markets in the world are right now
  2. How valuable each market sector is to the global economy

For maximum portfolio returns, make sure your stock investments are taking advantage of the most profitable sectors, and that your portfolio matches the sector weighting, or diversification, of the top ten global stocks.

Right now, these are the companies you should be looking at:

Profitable company #1 – Apple

One of the world’s largest and today, the world’s most profitable company Apple. The technology company has shown that you don’t need to dig deep holes in the ground or own billions worth factories to make massive profits. Apple is a technology company. But more importantly, the company comes up with ideas which it sells to people. It outsources manufacturing – and clearly doesn’t need to own the factories that produce iPhones to make money! 

Profitable company #2 – Exxon Mobil

Oil prices fell sharply in the second half of 2014, but this massive energy and chemicals company, Exxon Mobil’s, earnings slipped only $60 million to $32.5 billion. That’s good enough for second place in terms of profitability on the Fortune 500 list. Exxon's CEO Rex Tillerson said: "Our balanced portfolio uniquely positions Exxon Mobil to deliver superior results throughout the commodity price cycle”.

Profitable company #3 – Wells Fargo

Wells Fargo is the most profitable bank in the USA. The company sports a growing loan book, increasing deposits and a growing customer base. In 2014 it reported $23.1 billion in profits!

Profitable company #4 – Microsoft

We all know Microsoft, the company that sells Windows which is installed onto more than 1.25 billion computers worldwide. This technology/IT company has been at the forefront of profits for a decade. The company generates around $86 billion in turnover a year with roughly $22 billion in profits!

Profitable company #5 – JP Morgan Chase

JPMorgan Chase & Co. had $2.5 trillion in assets as of June, making it the largest bank holding company by assets in the U.S.
The company reported a net income of $17.4 billion, more than all but a few other companies. The bank grew significantly in the wake of the financial crisis, as it was able to acquire the collapsed investment bank Bear Stearns and most of lender Washington Mutual’s operations. Today, JPMorgan Chase is one of just three bank holding companies with more than $1 trillion in deposits as of June as well as more than 5,000 branches.

Profitable company #6 – Berkshire Hathaway

Everyone knows investment ‘genius’ Warren Buffett and his company Berkshire Hathaway. Interestingly Berkshire Hathaway’s made a couple of large acquisitions in the past couple of years: Heinz (consumer brands to the value of $28 billion), Burlington Santa Fe (a railroad operator for $44 billion), and IBM (a large IT company Berkshire paid $10.9 billion for).

Profitable company #7 – Chevron

Unlike Exxon Mobil, fellow oil-and-gas producer Chevron posted a far steeper decline in profit, down 10% to $19.2 billion for 2014. Results were hurt by a sharp drop in crude oil prices, which resulted in particular weak profits for Chevron's larger upstream business. The downstream business, however, improved and higher gains tied to asset sales helped offset the weak crude oil prices.

Profitable company #8 – Walmart Stores

Walmart is one of the world’s largest retail chains. Its annual revenue rivals the GDP of South Africa. But what’s important here is that the company supplies everyday people like you and I with the food, clothes and everyday essentials we need.

Profitable company #9 – Johnson and Johnson

Among the top 10 most profitable companies in the Fortune 500, drug maker Johnson & Johnson posted the second-largest profit growth in 2014 after J.P. Morgan. Profit increased 18% to $16.3 billion, thanks to strong revenue growth for the company's pharmaceuticals. New products to treat hepatitis C, type-2 diabetes and prostate cancer were among the treatments that helped lift sales. That growth helped offset sales declines for J&J's medical devices and consumer items, which include baby and skin care products.

Profitable company #10 – General Electric

General Electric saw $15.2 billion in profit last year, an increase of nearly 17%. Almost every segment reported an increase in profit, led by stronger gains for oil and gas, aviation, and appliances and light. 

What you should learn from these ten companies

Most importantly you should realise that IT and Technology have taken up a new spot in the world’s most important companies. Apple is the world’s most profitable business. But just think of all the new start-ups and stellar growth stories from internet companies like Google, Facebook and Twitter these days…

Something else that’s very important is the fact that the majority of the businesses in this group is CONSUMER orientated.

Think banking services, software systems, consumer goods, pharmaceuticals and retail stores. These are the companies that every person on earth interacts with every day and we can’t go without.

And there’s obviously one last thing that I found shocking was there are no miners on this list. Yes, there are energy and chemicals companies. But these companies aren’t miners. Drilling for oil is one part of what they do. But they produce fuel from the oil, fertilizers, soaps, wax and many other chemical products we all use every day.

While I do believe there are opportunities to make money from mining shares when they are misvalued I don’t see them forming part of a core portfolio of diversified shares these days.

This is even true for the JSE. Gone are the days of the 70’s and the 80’s where the mining companies were the largest, most profitable on the JSE. These days its companies like Naspers (Technology), British American Tobacco and SABMiller.

So if you look at your long term portfolio again, and you wonder about your performance (or lack thereof) ask yourself, “Am I heavily invested in financials, technology, chemicals and consumer goods?” because these are the best performers. And as world population continues to grow and people make more money they will continue spending more on these things.

Here’s to unleashing real value

Francois Joubert

Editor, Red Hot Penny Shares

What you can learn about diversification from the ten most profitable companies of the Fortune 500
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