#G5002015 #F5002015 Boeing
The Boeing 787 factory in Everett, Washington. Courtesy of Boeing

These are the 9 best Fortune 500 stocks to buy

Jun 26, 2015

The Fortune 500 rankings tell you a lot about the biggest American companies, but nothing about which of them have the most potential as investments. And certainly it pays to be choosy: the biggest- loser stocks on this year’s list are down as much as 68% just since the beginning of January.

Working with our Fortune 500 data guru, Scott DeCarlo, we set out to find the best stock picks among the companies in this year’s rankings. We started by screening for stocks that had a lower price-to-earnings valuation than the S&P 500, which trades at a 17.9 multiple of estimated 2015 earnings . But we didn’t stop there. After all, in the seventh year of a charging bull market, the stocks with the lowest P/E ratios are often cheap for a reason—turnaround stories, distressed energy companies, left-behinds or all-around dogs.

Instead, we looked for companies that already had some momentum, those that had outperformed the S&P 500 over the last five years (quite a feat, considering the index returned 115.4%, including dividends, in that time). And because investors are lamenting the virtually nonexistent earnings growth predicted for the S&P 500 this year, we set the bar higher than the Wall Street consensus for the index’s average 2015 EPS growth: We screened for companies that are expected to grow earnings by more than 5% this year, and to post positive growth again in 2016 .

Because many investors are looking for safety and stability in anticipation of a possible market downturn—not to mention income, that rare commodity in this low-interest rate era—we screened for stocks with a dividend yield of at least 2%, the S&P 500 average. To narrow it down even further, we kept only companies that had also increased their dividend at least somewhat in the last year, since dividend growers have demonstrated an uncanny ability to beat the market over the long-term.

Finally, we eliminated companies whose sales are expected to decline this year—which knocked out companies including Principal Financial Group (pfg), chemical producer Huntsman (hun), International Paper (ip), computer hard-drive manufacturer Western Digital (wdc), industrial tech maker Parker-Hannifin (ph), and the railroad operator CSX (csx). Last but not least, we crossed off cardboard packaging producer Rock-Tenn (rkt) because it's merging with MeadWestvaco Corp. (mwv), and the stock will cease to exist in its current form after the deal closes.

That left us with just 9 stocks, which we’ve ranked here in order of investment potential:

[Editor’s note: Performance and valuation figures were updated just before publication, and therefore will not be consistent with the figures in the Fortune 500 list that ran in the June 15 issue of Fortune magazine.]

Turkey's Haydarpasa General Cargo And RoRo Port
Cranes and shipping containers stand idle at the Port of Haydarpasa, also known as Haidar Pasha, on the Bosporus waterway, in Istanbul, Turkey, on Tuesday, Feb. 11, 2014. KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, hired Goldman Sachs Group Inc. to sell its Turkish shipping company U.N. Ro-Ro Isletmeleri AS, three people with knowledge of the matter said. Photographer: Kerem Uzel/Bloomberg via Getty ImagesPhotograph by Kerem Uzel — Bloomberg via Getty Images

1. KKR

FORTUNE 500 RANK: 356
5-YEAR TOTAL RETURN (THROUGH 6/22/2015): 231%
ESTIMATED EPS GROWTH THIS YEAR: 119.7 %
DIVIDEND YIELD: 8.3%
ESTIMATED 2015 P/E RATIO: 9.8

On its face, KKR (kkr) looks like a dream stock: A storied private equity firm managing nearly $99 billion that trades at a nearly 50% discount to the market—and pays a ridiculously high 8.3% dividend yield. Still, investors should be somewhat wary: As is typical in the private equity industry, KKR’s dividends—which are actually considered “distributions”—fluctuate dramatically quarter to quarter, depending on the firm’s investment exits. So while its total annual distributions have gone up each year since KKR went public, its payouts so far this year are slightly less than they were for the same period as last year. KKR’s revenues can be similarly uneven, as they depend on the underlying value of its investments and the fees it can generate from them.

But for investors who can handle that sort of volatility, there are several reasons to like KKR—and more than 83% of Wall Street analysts polled by Bloomberg rate the stock a “buy.” For one, the stock has pulled back recently as the slide in oil prices left several of the firm’s energy investments underwater, and now KKR is more than 23% undervalued, according to Morningstar. Plus, it should benefit as more money flows to private equity firms and other alternative asset managers, a trend consultants are predicting for the next few years. In the nearer future, KKR may also be in for a long-awaited payday: One of its largest investments, First Data, which has been struggling since KKR took it private in 2007, returned to profitability in February, stoking investors’ hopes that it could go public again as soon as later this year.

A shopper looks at a advertisement circular while shopping at a GameStop Corp. store in San Francisco, California, U.S. on Tuesday March 24, 2015.  GameStop Corp., is expected to release earnings figures on March 26. Photographer: David Paul Morris/Bloomberg
A GameStop store in San FranciscoPhotograph by David Paul Morris — Getty Images

2. GameStop

FORTUNE 500 RANK: 311
5-YEAR TOTAL RETURN: 162.6%
ESTIMATED EPS GROWTH THIS YEAR: 11.7%
DIVIDEND YIELD: 3.3%
ESTIMATED 2015 P/E: 11.3

GameStop (gme) is a familiar face on Fortune’s list of best stocks in the 500: When we ran a similar stock screen on last year’s 500 list, Fortune 500 top stock picks 2014. Through GameStop has returned nearly 23% since then—nearly double the S&P 500’s performance—it still looks cheap, trading at just 11.3 times its expected earnings this year. Skeptics worry that a traditional brick-and-mortar videogame retailer will find it harder to survive as people download games directly to their phones (and other digital screens), GameStop has been adapting to the trend: Its digital sales ( especially  the downloadable variety) grew 31% last year and another 17% in the first quarter of 2015 over the prior-year quarter—and margins on those sales surpassed analysts’ expectations to boot.

The company is also successfully moving into selling wireless devices themselves.  Its 2013 takeover of an AT&T resale chain called Spring Mobile spurred a 71% increase in GameStop’s mobile sales in 2014 and another 34% bump so far this year. Plus, GameStop just acquired the leases to 163 RadioShack stores which it plans to turn into Spring Mobile locations, likely boosting growth further .   Summing up GameStop’s good news during its first-quarter earnings call, Needham Co. analyst Sean McGowan wrote, “We view the quarter's results as an excellent start to what we believe will be a strong year.”

787 Factory Photos - Everett WA Oct. 2012
Courtesy of Boeing

3. Boeing

FORTUNE 500 RANK: 27
5-YEAR TOTAL RETURN: 147%
ESTIMATED EPS GROWTH THIS YEAR: 15.5%
DIVIDEND YIELD: 2.5%
ESTIMATED 2015 P/E: 17.6

Boeing (ba) has lately fallen out of favor among investors as the aircraft manufacturer has been losing money on its production of 787 Dreamliner planes, which have experienced technical snafus during testing. But as cheap fuel costs pad the profits of airlines—and also incite consumers to travel more—they may very well lead more carriers to upgrade their planes. At the recent Paris Airshow, a major sales event for the airplane industry, Boeing bested its main competitor Airbus with $18.6 billion in confirmed orders for aircraft. (Airbus beat Boeing in terms of less definite “purchase commitments,” which can still fall through.)

JPMorgan analysts recently assigned Boeing an “overweight” rating, explaining that they expect “improving [free cash flow] as 787 cash burn falls, rising repurchases and dividends, and favorable conditions for new aircraft production.” Boeing announced earlier this week that it will replace its current CEO, Jim McNerney, with longtime executive Dennis Muilenburg on July 1. While Boeing’s shares fell slightly on the announcement of the leadership change, Fortune managing editor Alan Murray wrote that the transition actually “signals stability” at the company.

Courtesy of Macy's

4. Macy's

FORTUNE 500 RANK: 105
5-YEAR TOTAL RETURN: 281%
ESTIMATED EPS GROWTH THIS YEAR: 11.1%
DIVIDEND YIELD: 2.1%
ESTIMATED 2015 P/E: 14.9

An improving economy plus cheaper gas prices adds up to a greater consumer desire to go shopping, and some investors think Macy’s (m) is likely to perform well in the current environment. “We believe Macy's is stronger than it was before the financial crisis and well positioned to serve the American middle class,” Morningstar equity analyst Paul Swinand wrote in a recent research note. While some analysts doubt the historic retailer’s ability to grow significantly (and first-quarter sales came in below Wall Street’s expectations, a result of a cold and snowy winter), Macy’s earnings are growing more than twice as fast as the average S&P 500 company’s—largely the result of bigger share buybacks. The department store is also increasing online sales and expanding into other types of retail, such as with Bluemercury, a luxury spa and beauty retail chain that Macy’s acquired in March and expects to drive more growth.

JPMorgan analysts also note that Macy’s is literally sitting on another big source of value: more than $10 billion worth of prime real estate, including its New York flagship "trophy asset" in Manhattan’s Herald Square, just a couple of blocks from the Empire State Building. And in many cases, the stores' real estate is worth more than their retail sales: Already this year, Macy's has sold one of its Silicon Valley stores to a real estate developer only to lease it back, and also announced plans to close 14 stores " where the real estate can be redeployed to more productive uses," CEO Terry Lundgren said in the announcement.

A pedestrian enters a Verizon Communications Inc. store in San Francisco, California, U.S., on Wednesday, April 15, 2015. Verizon Communications Inc. is scheduled to release earnings data on April 21. Photographer: David Paul Morris/Bloomberg
A pedestrian enters a Verizon Communications Inc. store in San Francisco, California, U.S., on Wednesday, April 15, 2015. Verizon Communications Inc. is scheduled to release earnings data on April 21. Photographer: David Paul Morris/BloombergDavid Paul Morris — Bloomberg via Getty Images

5. Verizon Communications

FORTUNE 500 RANK: 15
5-YEAR TOTAL RETURN: 123%
ESTIMATED EPS GROWTH THIS YEAR: 58.6%
DIVIDEND YIELD: 4.6%
ESTIMATED 2015 P/E: 12.3

Fresh off completing its $4.4 billion acquisition of AOL, Verizon (vz) is a controversial company on Wall Street, with less than half of analysts tracked by Bloomberg recommending that investors buy the stock. Verizon’s acquisition of AOL will allow the cellphone carrier to make “substantial” money off of mobile video using AOL’s advertising technology, but it could take three to five years “to reach a significant scale to move the needle,” JPMorgan stock analysts wrote in a June research note, explaining why they are neutral on the stock. In the meantime, though, Verizon is the biggest cellphone carrier in terms of subscribers, and its dividend yield, 4.6%, is more than double the S&P 500 average.

Courtesy of Ameriprise Financial

6. Ameriprise Financial

FORTUNE 500 RANK: 247
5-YEAR TOTAL RETURN: 267%
ESTIMATED EPS GROWTH THIS YEAR: 14.7%
DIVIDEND YIELD: 2.1%
ESTIMATED 2015 P/E: 13.5

Despite the stock’s huge gains since it was spun out of American Express (axp) a decade ago and since it acquired investment firm Columbia Management five years ago, Ameriprise (amp) trades at just 13.5 times its estimated earnings for 2015—and some analysts still think it has room to run,  with 57% of Wall Street analysts rating it a “buy." Ameriprise is beefing up the wealth management side of its business, which now oversees more than $500 billion in assets, generating an increasing portion of the firm’s earnings—at least as much as its insurance arm does, according to Morningstar. Ameriprise’s dividend yield is only slightly higher than the S&P 500 average, but its tradition of stock buybacks is also helping to grow its earnings per share.

Courtesy of Packaging Corporation of America

7. Packaging Corp. of America

FORTUNE 500 RANK: 451
5-YEAR TOTAL RETURN: 238%
ESTIMATED EPS GROWTH THIS YEAR: 14%
DIVIDEND YIELD: 3.3%
ESTIMATED 2015 P/E: 14.8

As Amazon (amzn) and other online retailers ship more goods to consumers’ homes, they need more cardboard boxes to package them in, and that’s where companies like Packaging Corp. of America (pkg) come in. While the death of the typewriter and the declining relevance of printers due to mobile technology have generally been bad for paper sales, e-commerce—and the cardboard packages it requires—has been the industry’s saving grace. Packaging Corp. isn’t exactly expecting explosive growth, but cardboard is a slow and steady, reliable sort of business—and the company’s 3.3% dividend could make it an income-generating safe haven for the long haul. As a bonus, recent declines in the price of energy—a big input cost for paper—are also benefiting Packaging Corp. at the moment.

Courtesy of Ingredion

8. Ingredion

FORTUNE 500 RANK: 462
5-YEAR TOTAL RETURN: 175%
ESTIMATED EPS GROWTH THIS YEAR: 19.1%
DIVIDEND YIELD: 2%
ESTIMATED 2015 P/E: 14.8

Wall Street’s feelings about Ingredion (ingr) are tepid at best: Only a third of analysts tracked by Bloomberg recommend buying the stock, while 22% would sell it, including Goldman Sachs. A producer of food additives and preservatives such as sweeteners and starches, Ingredion has been hurt as consumers have developed a distaste for high fructose corn syrup and artificial substances that they see as potentially harmful. Restaurants and food producers have been getting rid of artificial and processed flavorings to replace them with healthier or non-genetically modified (non-GMO) ingredients.

The bull case for Ingredion is that management seems determined to grow the company, likely through acquisitions, and also increase earnings per share through stock buybacks. And while Ingredion’s dividend yield is on par with the S&P 500 average, it has doubled its payout since 2012, and tripled it in the last five years, a tradition that shareholders obviously hope will continue.

Courtesy of CMS Energy

9. CMS Energy

FORTUNE 500 RANK: 383
5-YEAR TOTAL RETURN: 160%
ESTIMATED EPS GROWTH THIS YEAR: 8.4%
DIVIDEND YIELD: 3.6%
ESTIMATED 2015 P/E: 17.2

  The best thing CMS Energy (cms) has going for it is its relatively high dividend yield—typical for a utility stock. Still, yield-seeking investors have pushed up the company’s valuation to be nearly in line with the market average, and should interest rates rise, those same investors may turn elsewhere for their income stream. But CMS is a good coupon-clipping stock for now, and half of 18 Wall Street analysts recommend buying it,  according to Bloomberg. Analyst David Burks at Hilliard Lyons, for example, notes that CMS's management anticipates annual earnings growth of 5% to 7% for the next five years, "a higher growth rate than for the average utility"; that could also mean above-average increases in CMS's dividend, which has "plenty of room" to grow, Burks wrote in a June research memo. Still, investors should be wary: Burks warns that higher interest rates are a risk, and after a Federal Reserve hike, CMS may look better on paper than it performs in reality.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

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