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Switch To Blue Chips For A While

Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

 The market has been trading sideways lately with DOW and S&P hovering near 13,000 and 1,400 respectively.  While some are worried about the "fiscal cliff" and not putting any more funds at risk, others are not selling in possible optimism from modest home price increases or improved corporate earnings.  In a recessionary environment where the major indices are weak, it is time to temporary find safe haven in large cap names to mitigate the risk that is often present in smaller companies. 

Everyone's favorite tech giant Apple (NASDAQ: AAPL) has lost a little over $100 a share since September, which is approximately 12% of its September high of $702.10.  The analysts are divided between their price targets again with some claiming a lower level of $450 and others $900.  I honestly don't listen to any of these guys, I don't even watch Mad Money anymore.  This is what my Peter Lynch logic dictates - bargain hunt and pick good value stocks with good business models and great management by keeping an eye on the competition and you should do well

While I acknowledge Samsung's lead in attaining 11% global market share for smartphones, the fact that they trade on pink sheets and Korean secondary markets, forces investors to pour their money domestically with the second best.  Investing in Apple also means that you won't have to worry about your stock falling due to North Korean tensions.  Add the aggressive growth story in China, Japan, Korea and Russia as well as the 47 million iPhones Apple is expected to sell this quarter, and you have my optimism on the stock. iPhone 5 has barely now become fully available in stores of South Korea with additional 50 countries being added later in the month.  If this robust demand doesn't trump any newfound pessimism from some of the analysts out there, then I'm not sure if the company's debt free balance sheet will. 

I'm not a permanent bull on any stock so addressing some potential risks is imperative.  According to a research firm CIRP, the iPhone 5 accounted for 68% of iPhone sales in October of this year.  That's down from the 90% claimed by the iPhone 4S in October of 2011, and indicates a mix shift towards cheaper and lower-margin iPhones.  In addition, only 9% of October iPhone 5 sales involved very high-margin 64GB models, compared with 23% of October 2011 4S Sales.  If those numbers are accurate, they might have something to do with Apple's light FQ1 gross margin guidance.   Apple has also become a dividend stock, which means that it might not see the aggressive rise seen in growth stocks, and might enter a phase of maturity if it doesn't continue to innovate next year. 

I also favor Caterpillar (NYSE: CAT) due to their sheer size, global branding power and sustainable demand from mining.  The recent closing of the plant in Owatonna and surge in generator demand from Hurricane Sandy translates to savings and increase in sales. Caterpillar is also expecting its capital expenditures to come in 5-10% lower for the upcoming year.  It is trading at a 20% discount from Credit Suisse's price target of $108. 

Although global economic uncertainties have recently began to limit CAT's sales growth, its top line growth is aided from Bucyrus, the mining equipment company acquisition of 2011.  The company paid $8.8 bln. for Bucyrus, which included its net debt.  It expects the acquisition to bring in half a billion of annual revenues by 2015 from opening Bucyrus' operations to its worldwide dealer organization capturing its aftermarket parts and services business. 

In the last decade, Caterpillar recorded a compound annual growth rates of 11.4% in sales and 21% in EPS.  For 2013 it expects to see an EPS of $10.20 compared to the $9.40 of this year.   What drives forward companies like Caterpillar and John Deere is the ongoing urbanization of emerging markets.  Strong economies and the constant need to replace machinery and power systems in developed markets greatly boosted CAT's operating results in the last few years and continue to do so.

If you’re disheartened about every other stock, then at least have faith in Coca-Cola (NYSE: KO), Buffett's favorite turnaround story.  Let's be real, Coca Cola and its Western European segment Coca Cola Enterprises (NYSE: CCE) will be here after we are long gone.  The beverage giant is literally in every country on the planet selling a whopping 1.7 billion bottles a day, but how much can it possibly grow?

<img src="/media/images/user_5086/worldpopulation_large.JPG" />

The world population currently stands at 6.97 billion people, but is currently on decline.  The population boom that we experienced since 1970s with an average growth of 2% a year is history.  As the chart shows, the population growth rate has been steadily declining in almost all the world regions according to World Health Organization.   After all, it cannot grow more than the global population growth and is facing somewhat of a risk as new generations are increasingly becoming more health conscious. 

After a 2:1 split on August 13th, KO has been steadily declining nearly 8.5%.  The decrease in stock price was also exacerbated by the California's proposal to require labeling of genetically modified foods, which will also affect its largest competitor and snack food producer, PepsiCo. Inc.  In my opinion the mayhem is already priced in and the stock is ready to form a support near $37 and tread higher from here.  Due to a low beta of 0.51, which means KO is 49% less volatile than the S&P, the stock is not a good candidate for option trades unlike Apple for instance.  If you like Coca Cola, consider diversifying with its Western European segment since CCE actually outperformed KO by 15% in the last 6 months. 

Foolish Conclusion

The fiscal cliff leading to higher taxes and spending cuts is unavoidable.  Our desperation to bring a balance to our state and local budgets is already shown in attempting to create jobs by marijuana legalization in states like Colorado and Washington.  Most see this event as a deja vu from 1933 as the end of Prohibition aided our depression recovery from increased tax revenues.  During an economic stagnation as we are experiencing now, it is recommended to switch to multinationals with strong balance sheets and solid brand names that can weather the storm by having high demand for their goods in the worst of times. 


edgarambart30 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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