Stocks can sell at bargain prices on any day in any kind of market. But only in troubled markets can we find many of the biggest and best companies in the world on sale at the same time.
This is such a market. The S&P 500 is at the same level today that it was at almost 10 years ago. Year to date, the S&P 500 and the Dow are both down roughly 12%. Now is a good time to search for high-quality stocks that can form the core of your future portfolio.
What's a blue-chip stock?
"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 to dividends, stable earnings, a strong balance sheet, and industry leadership are all staple characteristics of blue-chip companies.
We can screen for stocks that have not only these qualities but also have a five-star rating, the highest possible, in the 115,000-member Motley Fool CAPS community. Five-star stocks have significantly outperformed the overall market.
|
Company |
CAPS Rating |
Market Cap (in Billions) |
Long-Term Debt-to- Equity Ratio |
Dividend Yield |
EPS Growth (Past 3 Years) |
Return on Equity |
|---|---|---|---|---|---|---|
|
3M |
***** |
$48 |
0.33 |
2.89% |
10.23% |
29.9% |
|
DuPont |
***** |
$40 |
0.42 |
3.67% |
14.1% |
26.4% |
|
Emerson Electric |
***** |
$34 |
0.34 |
2.7% |
19.5% |
24.1% |
|
FranceTelecom |
***** |
$72 |
0.00 |
10.2% |
24.93% |
21.1% |
|
Novartis |
***** |
$121 |
0.02 |
2.8% |
30.64% |
24.5% |
|
Pepsi |
***** |
$111 |
0.36 |
2.45% |
11.9% |
34.9% |
|
Bank of Nova Scotia |
***** |
$44 |
0.22 |
4.4% |
15.1% |
20.9% |
All data from CAPS as of 9/10/08.
These stocks are not recommendations but rather a starting point for further research.
The two companies I found of particular interest are Novarits and 3M. I like Novartis because it's a blue-chip company in a typically defensive industry. I like 3M because it's a Dow stock that epitomizes a company with a long track record of paying dividends in good times and bad.
What looks cheap?
Novartis is a blue-chip stock on sale. It's currently selling below 10 times earnings, near the low point of its five-year range, and it has sold off by more than 13% from its 52-week high in just the past month. The company also has a remarkably low beta of 0.2, which, compared with a baseline of 1.0, means the stock is defensive because it's only one-fifth as volatile as the overall market.
But the company is cheap for a reason. Saying Novartis lacks a catalyst to drive its stock higher, Deutsche Bank recently issued a downgrade. There's no surprise potential on the earnings front, and the near-term pipeline of new drugs is thin, Deutsche Bank argues. J.P. Morgan also downgraded the stock more than a month ago over similar concerns of short-term obstacles -- even though the stock was near its 52-week high back then. And although Novartis beat estimates last quarter, the drugmaker got an assist from the falling dollar. If the dollar continues to rise, it could have a reciprocal negative affect on future earnings.
Still, there doesn't seem to be a lot of downside from this point, even if Novartis is unlikely to give you returns worth bragging about. The current shallow pipeline and limited short-term upside may have been priced into the stock already.
Whom can you count on to pay dividends?
3M currently pays a 2.89% yield and has a strong record of paying dividends in good times and bad. In fact, the last quarterly payout was 3M's 368th consecutive quarterly dividend -- a streak that goes all the way back to 1916! If 3M could continue to pay a dividend through a depression and two world wars, the company should be able to maintain its dividend in the current environment.
This company is a huge multinational organization that operates in more than 60 countries. In fact, two-thirds of the company's revenue came from outside the U.S. last quarter. That level of global profits may be difficult to maintain, however, because foreign economies are slowing. In addition, a strengthening dollar could hamper overseas profits.
On the other hand, falling energy prices, which are a significant cost of business for 3M, could help offset the lower global sales revenue going forward. Profits probably won't be booming in the upcoming quarters, but given a price near the yearly low and a healthy dividend, the stock makes some sense as a long-term defensive play.
Final thoughts
Stock in the world's best companies can offer some stability if the market goes the wrong way. They also give you an excellent chance for long-term growth. Troubled markets are the season to add blue-chip stocks 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 with CAPS now!
