5 Surprising Names That Beat the Best Blue Chips

With today's economic uncertainty, many investors are looking for safety and stability in their investments.

So to help you out, I recently wrote a column identifying the top 10 blue chip stocks. From among the entire S&P 500 (INDEX: ^GSPC), I pulled out the top-ranked stock in each sector on the basis of several key metrics that are indicators of competitive advantage and reliability.

These were the winners:

Sector

Company

Consumer discretionary

McDonald's

Consumer staples

PepsiCo (NYSE: PEP  )

Energy

Apache (NYSE: APA  )

Financials

T. Rowe Price

Health care

Stryker (NYSE: SYK  )

Industrials

Precision Castparts

Information technology

Intel (Nasdaq: INTC  )

Materials

Nucor

Telecommunications

CenturyLink

Utilities

Exelon (NYSE: EXC  )

But let's not forget that companies with strong competitive advantages are not always the most prominent. Oftentimes smaller or lesser-known names can generate superior returns by carving out a competitive niche.

Case in point: Nucor (from the table above), which worked under the radar for years as the low-cost producer of lower-grade steel, steadily carved out increasingly broad niches until it now battles with U.S. Steel for top steel producer in the United States.

In short -- you don't always have to be a well-known company to have a strong moat.

While all 10 of the companies listed above earned the prize for best blue chip in their sectors, could it be that a few under-the-radar companies might be exhibiting superior performance to those blue chips?

It turns out that even when we include thousands of extra candidates, PepsiCo, Apache, Stryker, Intel, and Exelon still came out on top of their respective sectors.

But in five of the sectors, non-S&P 500 companies actually displayed superior numbers. Here are the five names that managed to beat the best blue chips at their own game:

Sector

Company

5-Year Average Return on Assets

Operating Margin

1-Year Revenue Growth

10-Year Dividend Growth

Consumer discretionary

Strayer (Nasdaq: STRA  )

29%

32%

13%

30%

Financials

Texas Pacific Land Trust (NYSE: TPL  )

32%

85%

35%

10%

Industrials

Sun Hydraulics (Nasdaq: SNHY  )

15%

25%

53%

19%

Materials

Southern Copper (Nasdaq: SCCO  )

25%

52%

32%

38%

Telecommunications

Atlantic Tele-Network (Nasdaq: ATNI  )

10%

5%

126%*

12%

Source: S&P Capital IQ. *Includes effects of recent acquisitions.

Strayer operates about 90 for-profit college campuses. The education boom has certainly been lucrative -- returns on assets have risen dramatically every year for the past half-decade. If you're worried about the crackdown on dodgy recruiting and lending practices in the for-profit education industry and are looking for an alternative, know that snow mobile maker Polaris came in a close second.

Texas Pacific Land Trust owns a bunch of oil and gas and ranching land in Texas that it licenses and leases. It actually tied for first place among financials with everyone's second-favorite rating agency, Moody's (NYSE: MCO  ) , a company which so far has remained surprisingly resilient despite its industry's role in the financial crisis and the collapse of large parts of the structured finance market.

Sun Hydraulics is the market leader for screw-in hydraulic valves and manifolds, which are used in heavy construction equipment like bulldozers and drilling. Dominance of its niche has allowed the company to remain profitable every year for nearly four decades and produce outstanding margins.

Southern Copper may not be a member of the S&P 500, but the company's massive scale helps make it a low-cost producer of copper and molybdenum. While earnings may be quite vulnerable to swings in commodity prices, there's no denying its wide moat and superior margins.

Atlantic Tele-Network is a small wireless and wireline communications company for underserved and technically challenging markets -- like the Southwest desert and the Caribbean islands -- that the major telcos might be too big to bother with. The company has grown through acquisition in recent years.

Now, just because these companies exhibit superior numbers to the best blue chips doesn't automatically mean they're safer investments or better stocks to own. But it certainly is an excellent indication that they may be worthy of further investigation. And if you're looking for reliable stocks to buy today, consider the names above alongside The Motley Fool's brand-new special report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can discover the names of these 11 rock-solid dividend stocks and exactly why our analysts love them clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of T. Rowe Price Group, Intel, PepsiCo, and Sun Hydraulics. Motley Fool newsletter services have recommended buying shares of Precision Castparts, Moody's, McDonald's, Stryker, Sun Hydraulics, Exelon, Intel, Nucor, and PepsiCo. Motley Fool newsletter services have recommended writing puts in Moody's. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Motley Fool newsletter services have recommended creating a write covered strangle position in Exelon. 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.


Read/Post Comments (3) | Recommend This Article (34)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2011, at 8:23 PM, Bonefish100 wrote:

    Hmmm. Let's see...

    ALL five stocks are trending down, TPN has a P/E ratio of 27 and ATNE has a P/E of 31.50.

    Sounds good to me!

  • Report this Comment On October 28, 2011, at 3:33 AM, antsy65 wrote:

    A foolish article on Sun Hydraulics on 30 September 2011 stated that: "We're looking at a micro-cap stock whose management team doesn't seem to have a handle on market trends -- resulting in a highly volatile stock."

    Has the management team changed so much in the last four weeks?

  • Report this Comment On November 07, 2011, at 2:39 AM, chexxer42 wrote:

    AS a non USA investor I favour buying the blue chip world wide companies around half of the list appear to be in this category.

    So if the US dollar tanks I won't be hit quite so hard?

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