Large-Cap Stocks with Upside Potential and One Facing Headwinds
Two large-cap stocks have shown exciting potential and one is facing headwinds. O'Reilly Automotive (ORLY) and DexCom (DXCM) are growing their earnings, while Salesforce (CRM) may be tapped out.
O'Reilly, a retailer of auto parts and accessories, has seen increased demand in locations open for at least a year, with same-store sales averaging 4.9% growth over the past two years. Its disciplined cost controls and effective management have resulted in a strong two-year operating margin of 19.4%. The company's industry-leading 42.2% return on capital demonstrates management's skill in finding high-return investments.
DexCom, which develops continuous glucose monitoring systems for people with diabetes, has a healthy core business that doesn't need acquisitions to boost sales. Its organic revenue growth averaged 12% over the past two years, and its free cash flow margin expanded by 20.2 percentage points over the last five years.
However, Salesforce's customer relationship management software may be underwhelming investors. Its average billings growth of 11.2% underwhelmed expectations, and its operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs. The company's stock price implies a valuation ratio of 4x forward price-to-sales.