What do we know about the market right now? Let's review.
The S&P 500 is up 75% since the lows of last March, the vast majority of companies that have reported earnings so far this season have beaten estimates, housing is showing signs of stabilization, and the Fed has kept interest rates ridiculously low. At the same time, unemployment is still high, Greece is in full-on crisis mode, government spending is through the roof, and valuations -- at least on a multiyear basis -- appear to be a bit rich.
But where does that leave investors? It leaves us, as always, trying to figure out what businesses will do well and where we can find valuations that are still attractive. Fortunately, I think the answers to those questions are easier today than they normally are.
Bullish notions from a bear
If you're not familiar with Jeremy Grantham, he's the chief investment strategist at GMO, an asset manager with well over $100 billion under management. And if there's one thing that Grantham's not, it's a bull. Not only does he think that the fair value of the S&P is 875, but he also believes that the most likely outcome for the U.S. markets is a continued climb punctuated "once again by a very dangerous break."
But as I've pointed out before, Grantham does have a soft spot right now -- large, high-quality U.S. stocks. Here's what he said in the market commentary GMO released last week:
Surprisingly, within the U.S. the large high quality companies are still a little cheap, having been left totally behind in the rally. They are unlikely to do very well in a bubbly environment, however long it lasts, but should be great in declines and in the end should win. A potential plus for quality franchise stocks in the next few years is that they are far more exposed to emerging countries and, as investors fall in love with all things emerging, this should be seen as an increasing advantage.
And GMO puts its money where Grantham's mouth is. At the end of the year, the manager had billion-dollar positions in high-quality large caps such as Johnson & Johnson
Easy like Sunday morning
Now I'm not going to say that there aren't great small-cap stocks trading right now at very attractive valuations. As my colleagues have pointed out on numerous occasions, the fact that large institutions tend to overlook small stocks means that there are often some big opportunities floating around in the small-cap pool.
Normally, investors have little choice but to turn to small caps if they want to beat the market, since blue chips don't tend to get overlooked. But if you believe Grantham, they have been overshadowed lately.
Here are a handful of blue chips that I think are in bargain territory today.
|
Company |
Industry |
Trailing
|
Trailing
|
Forward
|
Dividend Yield |
|---|---|---|---|---|---|
|
Intel |
Technology |
15.1% |
21.4 |
12.5 |
2.6% |
|
Total |
Energy |
16.6% |
11.3 |
7.8 |
5.4% |
|
Sysco |
Consumer Discretionary |
31.5% |
16.6 |
15.9 |
3.2% |
|
Chubb |
Financials |
15.0% |
8.8 |
10.0 |
2.8% |
Source: Capital IQ (a Standard & Poor's company) and Yahoo! Finance.
You may notice that I listed dividend yields with all of these stocks. One of the great aspects of investing in large blue chips is that most of them are making sure their shareholders profit from the company's success by paying out a dividend. And while some may scoff at 2% or 3% yields, with five-year Treasuries yielding 2.5%, those payouts look pretty enticing to me.
What's more important about all of these stocks, though, is that they're not just a bunch of numbers in a table; they're backed by some of the best companies in the world.
A couple of weeks ago, Intel reminded the market why it's the king of the semiconductor world. The company is coming out of the recession swinging and reported revenue of $10.3 billion and net income of $2.4 billion, which were up 44% and 288%, respectively from the prior year. Though Intel does succumb to the cycles of the semiconductor industry, it's a simple, straightforward business with a strong, clear leadership position.
Total and Sysco similarly fall under the category of easy-to-understand, high-quality businesses. Total is a worldwide energy giant and has a huge global footprint stemming from its home base in France. Sysco, meanwhile, is the 800-pound gorilla of food distribution and serves some 400,000 customers.
As for Chubb, if there were ever a show of conservatism and strength, it was Chubb's performance during the financial meltdown. In 2007 and 2008, while competitors were whining for government handouts, Chubb reported a spiffy $4.6 billion profit.
In other words, these companies are as close to no-brainers as you can get in the investing world, and they're currently trading at pretty attractive prices. So what's the easiest investment you can make today? I think it's the high-quality companies that you've always wanted to own.
What's your favorite high-quality blue chip? Head down to the comments section and share your thoughts.
When will it be time to turn around and sell these stocks? According to Fool co-founder Tom Gardner, maybe never.
