7 Blue Chips Ready to Rock

Stocks can sell at bargain prices on any day in any kind of market. But only in troubled markets like today's can we find many of the biggest and best companies in the world on sale at the same time.

The S&P 500 is at the same level today as it was almost 10 years ago. Year to date, the S&P 500 and the Dow are both down more than 18%. Now is a good time to search for high-quality stocks that can form the core of your future portfolio.

Blue chip, big prestige
"Blue chip" is a term applied to the largest and most prestigious companies in the world. These companies often have a record of consistently paying dividends in good times and bad. And dividends have accounted for more than 41% of the market's total return since 1926. In addition, stable earnings, a strong balance sheet, and industry leadership are all characteristics of blue-chip companies.

We can screen for stocks that not only have these qualities but also sport a four- or five-star rating, the highest possible, in the 115,000-member Motley Fool CAPS community. In the first 20 months we've tracked them, five-star stocks have significantly outperformed the overall market.

Here are several I found recently:

Company

CAPS Rating (out of 5)

Market Cap (in billions)

LT Debt-to-Equity Ratio

EPS Growth Rate (last 3 years)

Dividend Yield

Alcoa (NYSE: AA  )

****

$18.37

0.41

23.4%

3.0%

Archer-Daniels-Midland (NYSE: ADM  )

****

$14.12

0.57

24.4%

2.4%

Consolidated Edison (NYSE: ED  )

*****

$11.74

0.91

16.1%

5.4%

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

*****

$21.83

0.45

27.6%

3.8%

Honeywell (NYSE: HON  )

****

$30.93

0.64

24.7%

2.6%

Lockheed Martin (NYSE: LMT  )

****

$43.47

0.41

25.5%

2.1%

Nokia (NYSE: NOK  )

****

$70.82

0.01

35.4%

4.2%

Source: Motley Fool CAPS, as of Oct 1.

These stocks aren't recommendations, but rather a starting point for further research. Here are more details on a few of these ideas.

Will commodities come back?
As the global economy has begun to slow, worldwide commodity prices have experienced one of the steepest sell-offs in many years. Consequently, stock in Freeport-McMoRan, the copper and gold miner, is off more than 50% from the highs set just this past May. Meanwhile, the stage is set for a long-term bull market in commodities as China, India, and Brazil continue to industrialize and will probably bring worldwide commodity demand to a level never before seen.

Here is the question: Are we in the beginning stages of a deep global recession that will continue for years? If so, commodity prices and Freeport stock could continue to languish. Or, is this a low point in commodity prices precipitated by a temporary panic in the midst of a longer-term global economic boom? If so, it could be a good entry point into commodity stocks. Nobody knows. But, sooner or later, commodity prices should rebound. Meanwhile, Freeport stock is paying you 3.8% while you wait.

Lockheed Martin: Is defense the best defense?
While the S&P 500 is down nearly 22% for the past year, Lockheed is actually higher for the same period. The nation’s largest defense contractor just last week announced a 36% dividend hike and increased share buybacks. In addition, Lockheed is somewhat immune from the current credit crunch because it has about $3 billion in cash reserves.

With two wars still going and a lot of geopolitical uncertainty, defense companies should prosper, even in the current economic environment. However, there is some uncertainty caused by two main factors. November could see the election of a president and Congress less committed to defense spending. And, the $700 billion bailout package could usurp federal dollars previously earmarked for defense spending.

Nokia: getting cheaper
The mobile device and service provider has been clobbered with the overall market. It’s selling near its 52-week low at less than nine times earnings. In fact, the stock is trading at the same price it was nine years ago. The company has been consistently growing earnings per share, over 35% per year for the last three years, with a solid balance sheet. The 4.2% dividend seems safe with a 34% payout ratio and solid earnings and cash flow.

While the company may be losing its market share in the U.S. -- and it faces tough competition virtually everywhere, in my opinion -- that’s more than reflected in the price. Who knows when the market will return? But, when it does, it should give Nokia a nice ride.

Final thoughts
Stock in the world's best companies can offer some stability when the market goes the wrong way, and they can serve as excellent prospects for long-term stable growth, too. Troubled markets provide an excellent opportunity to add some blue chips to your portfolio.

What do you think about blue-chip stocks? Speak your mind on Motley Fool CAPS. More than 115,000 investors are waiting to hear what you have to say. CAPS is 100% free, so get started!

On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Tom Hutchinson doesn't own shares in any company mentioned. The Motley Fool has a disclosure policy.


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