The hottest investments in 2009 have been, in no particular order:

  1. Emerging-market stocks, especially Chinese stocks
  2. Bonds
  3. Risky, debt-laden U.S. stocks

Following the bludgeoning we took last winter, it's no surprise that investors have either sought lower volatility in the fixed-income market or have tried to regain some ground in more volatile equities.

Those sectors may have been the market's strongest buys last December, as the market was extremely risk averse, but not this December. No, the market's strongest buys today are in the very areas that investors at large have been ignoring this year -- namely high-quality, U.S.-based blue chips.

Boo this man!
In his most recent quarterly letter to investors, GMO Capital's Jeremy Grantham argued that "Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets."

It's these companies, after all, that not only have the balance sheets to withstand another shock to the economy in the coming years, but also generate a substantial amount of their earnings overseas -- a bonus for those who believe in the emerging-market growth story and the need for diversification away from the U.S. dollar.

Incredibly, investors have largely shunned a number of high-quality U.S. blue chips in favor of the aforementioned three alternatives.


  • Emerging-market stock funds received inflows of $75 billion so far in 2009 (well above the 2007 record of $54 billion), versus $83 billion redeemed from developed-market funds.
  • Year to date, taxable and municipal bond funds have taken in $300 billion, versus an outflow of just $22 billion for stock mutual funds.

And that means savvy investor can find some excellent opportunities.

Best buys now
With many investors' attention turned elsewhere, here are five U.S. blue chips that deserve some extra research right now.

To find promising, long-term candidates, my search targeted companies with:

  • Return on equity greater than 15%.
  • Interest coverage (EBIT/interest expense) over 10.
  • Price-to-free cash flow below 20.
  • More than 20% of sales overseas.


Return on Equity

Interest Coverage

Price-to-Free Cash Flow

% of Sales Overseas

Flowserve (NYSE: FLS)





McDonald's (NYSE: MCD)





Kimberly-Clark (NYSE: KMB)





Hewlett-Packard (NYSE: HPQ)





Johnson & Johnson (NYSE: JNJ)





Data from Capital IQ, as of Dec. 11.

Now compare these high-quality companies with the financial health of two stocks that have led the junk rally since early March: Office Depot (NYSE: ODP), up more than 800%, and Rite Aid (NYSE: RAD), up nearly 500%.


Return on Equity

Interest Coverage

Office Depot



Rite Aid

No equity


Surely congratulations are in order for investors who bought into Office Depot and Rite Aid in early March when the market was avoiding risky assets -- both have since become multibaggers.

But these "frog-to-prince" stories have not only played by now, but another downturn in the economy could further rattle these highly leveraged companies.

Coming full circle
At the end of the day, investing is not just about buying low and selling high. It's about being comfortable and understanding what you own. If you don't, you're more likely to panic and make poor trading decisions. In today's market you can have the best of both worlds through buying quality U.S. large caps at good prices.

Simply put, they're the market's strongest buys right now.

I've already given you five ideas to get started, but if you want to find similar ideas for yourself, start by looking for companies with the following qualities.

  1. Built to last 100 years or more.
  2. Dominating growing industries.
  3. Helmed by committed and proven management teams.
  4. Governed by the highest corporate values.
  5. Consistently increasing shareholder value.

Our Motley Fool Stock Advisor service believes that Coach fits the bill perfectly, and it has a place on the team's list of recommended "Best Buy" stocks. If you'd like to learn about the other stocks we're recommending at Stock Advisor, a free 30-day trial to the service is yours. Just click here to get started.

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This article was originally published Nov. 6, 2009. It has been updated.

Fool analyst Todd Wenning wishes you a Merry Christmas. He owns shares of Johnson & Johnson, a Motley Fool Income Investor recommendation. Kimberly-Clark is also an Income Investor pick. The Fool owns shares of Flowserve and has a disclosure policy.