Blue Chips May Offer Port in a Storm

By Mary Sutton - August 16, 2012 | Tickers: KO, JNJ, MSFT, PEP, CLX | 0 Comments

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The stock market is rallying, but some, like Charlie Morris at HSBC warn that this is just a setup for a bigger collapse.

The number of people who think the stock market is just a game rigged to benefit the house is on the rise (just Google it and look at the hits). US investors afraid of loosing their savings are fleeing to cash and bonds, accepting low returns in exchange for the relative assurance of protecting principal. 

Yet, the market continues to rally, and investors are assured that now is a great time to get in the game and snap up some of the market’s best values. 

So who is right? 

Chances are, both. Yes, Europe’s markets are a hot mess right now, and people are probably right to approach that area with concern. The US still has looming debt problems, with another argument about the debt ceiling likely to happen this fall or next spring. And worries are surfacing about long-term price concerns for some of the Dow’s biggest gainers. 

And it’s always been true that the biggest players on Wall Street always stand to make the biggest buck. 

However, that doesn’t mean there are no values to be had, or that average Joe's and Jane's should give up on the Street. It might not be the best time to invest in foreign debt or the “hot stock of the moment,” but there are stocks that weather tough times better than others. 

Yes, I’m talking about blue chips. Those steady earners that were often scoffed at during the rapid rise of tech stocks that offered much bigger returns. However, in times of trouble, blue chips can offer a much-needed haven. With a large market capitalization and a proven track-record of success, blue chips won't result in eye-popping double or triple digit returns. But neither will they give investors indigestion with double or triple-digit losses.

For example, take PepsiCo (NYSE: PEP). No matter the state of the economy, people will drink Pepsi and eat Lay's potato chips. Kiplinger reports that Pepsi is trading at 15 times earnings for the next 12 months, as cheap as it’s been in a while. Pepsi's dividend payments have been decent (>3% yield), although the stock price has remained flat. But what may be more important to investors in today's market is that Pepsi has a history of reliable payments. Over the past five years, Pepsi has paid out $29 billion to shareholders. To combat the flat stock price, Pepsi has announced some leadership changes and product tweaks designed to help narrow the gap between it and rival Coca-Cola (NYSE: KO)

Speaking of Coca-Cola, that is another potentially attractive blue chip, with a P/E of 20.8. The largest beverage company in the world has consistently increased dividends and over the last decade delivered over a 6% annualized return. Even though Seeking Alpha's Jim Pyke says that Coca-Cola might be overvalued in the short-term, that analysis does not prevent the company from being a solid long-term investment. Probably even more important is that both companies have a solid history of paying dividend income.

Even in a recession people need to clean themselves and their homes, making Johnson & Johnson (NYSE: JNJ) and Clorox (NYSE: CLX) good buys. Johnson & Johnson's current P/E is 21.73. Investors looking to pick up a stock "on sale" so to speak might nix JNJ. However, if you look a little deeper, you see that the company's free cash flow remains strong and any reported losses exist only on paper. The lawsuits and recalls that resulted in JNJ's earnings-per-share drop are (hopefully) one time events.

Clorox approved a nearly 7% dividend increase this week and has a 10-year annualized rate of return of 8%. The company has paid dividends on its common stock continuously since 1968 and has increased those payments every year for the last 34 years. CLX has a P/E of nearly 18 and earnings per share of $4.10 as of today. There's no reason to think that CLX would change it's divident payment trend any time in the foreseeable future.

Much-maligned tech giant Microsoft (NASDAQ: MSFT) is still trading at a P/E of 15, and while tech junkies might predict the end of tech’s “evil empire,” Microsoft is still making money from existing products and patents. It's true that Microsoft has recently irritated hardware vendors, notably Toshiba and Acer, with decisions surrounding Windows 8 and Microsoft's own Surface hardware and it still might pay for those decisions.

While there’s no such thing as a guaranteed “recession proof” stock, stocks such as these are going to come out a lot better that your average start-up.

Ask someone if he is concerned about retirement, the answer will probably be a resounding "yes." However, investors seem to be running to bonds. Since interest rates can't go lower than zero, they have nowhere to go but up. The Fed can only keep rates low for so long.

Conversely, the market is rife with blue chip stocks at historically low valuations that are paying steady dividend income. Market experts lament this short-sighted view that appears to be held by a large portion of the investing public. Seeking Alpha's Chuck Carnevale makes a strong case for using blue chips to prop up retirement plans.

Not up for trading individual stocks? Look for mutual funds that invest in these companies. Almost every major mutual fund company offers a fund that invests most, if not all, of their assets in large-cap stocks such as those mentioned. Or you can find funds outside the major houses. 

Yeah, things are a little rocky on Wall Street right now. But with a little knowledge and a lot of patience, the savvy investor can still find a good deal.

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