Do you know where the term "blue chip" comes from? It's from poker. At the poker table, when you want to make your friends squirm in their seats, you bet with some blue chips, because those are the ones with the highest value.
In investing, blue chips are the biggest, most stable companies. They are mature within their industries. They are usually still growing, but not as fast as when they were younger. Many of these companies are seen as bellwethers of the general economy.
Blue chips headed for red?
Despite their name, Fools recognize that not all blue-chip companies are created equal. Our Motley Fool CAPS community is somewhat skeptical on the prospects of these five:
|
Company |
Net Debt |
Debt/Capital |
Dividend Yield |
EV/EBITDA |
6-Month Price Change |
CAPS Rating |
|---|---|---|---|---|---|---|
|
Gap |
($1,703) |
0.0% |
2.1% |
3.7 |
(19.3%) |
** |
|
Starbucks |
($846) |
13.0% |
2.0% |
9.8 |
4.2% |
** |
|
MasterCard |
($3,434) |
0.0% |
0.3% |
9.0 |
(9.4%) |
*** |
|
Home Depot |
$7,354 |
33% |
3.0% |
8.7 |
(1.5%) |
*** |
|
Best Buy |
$658 |
18.0% |
1.5% |
5.1 |
(2.2%) |
*** |
Source: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's.
Right off the bat, it's what isn't in these basic financial numbers that jumps out. Nothing seems terribly egregious here. Three of these companies have more cash than debt, and for even the biggest borrower on the list -- Home Depot -- debt constitutes only 33% of the firm's capital. Based on the simple valuation measure of enterprise value-to-EBITDA, none of these five seem massively overvalued. In fact, Best Buy and Gap, at 5.1 times and 3.7 times, respectively, look rather cheap.
Surprised?
The two most surprising on this list might be Gap and Home Depot.
For Gap, which ranked the worst of these retailers according to CAPS, the numbers belie the communal Foolish sentiment. Gap has no debt, a bunch of cash, a nice 2.1% dividend yield, and, after the price has come down about 19% over the last six months, is trading at cheap-looking multiples. But there is more to Gap's story than just its raw financials. There are also the concerns that come with a retailer operating in a soft economy, and the possibility of fashion risk -- or at least the risk that people are no longer willing to pay $60 for a Banana Republic sweater.
Home Depot is the grand-daddy of this list. With its $53 billion market cap, it is nearly twice the size of the next biggest (MasterCard, at $29 billion). It also pays out the biggest divided -- 3% -- and it employs a business model that generates a ton of cash. The firm has produced more than $5 billion in cash from operations for each of the past seven years.
So why the glum rating from the Foolish community? One reason might be that Home Depot has been swept up in the current whirlwind of negative sentiment around the housing industry, even though it is really in the business of home improvements, not new home construction, and, though related, the home improvement industry has different supply and demand dynamics. There might be some concerns about the company's fledgling stores in China. It also might have to do with Wall Street downgrades of the company's stock.
Which of these five do you think doesn't belong on this list? And, one step further, which company do you think should take its place?
If you'd like to learn more about avoiding unattractive blue-chip investments and identifying their high-prospect cousins, check out our premium dividend newsletter, Motley Fool Income Investor.
