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.
This is such a market. The S&P 500 is at the same level today that it was almost 10 years ago. Year to date, the S&P 500 and the Dow are both down about 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 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.
|
Company |
CAPS Rating (out of 5) |
Market Cap (in Billions) |
Percent Below 52-Week High |
Dividend Yield |
|---|---|---|---|---|
|
Colgate-Palmolive (NYSE:CL) |
***** |
$37.17 |
5.6% |
2.2% |
|
Johnson & Johnson (NYSE:JNJ) |
***** |
$191.17 |
6% |
2.7% |
|
Novartis (NYSE:NVS) |
***** |
$119.63 |
14.1% |
2.8% |
|
PepsiCo (NYSE:PEP) |
***** |
$111.28 |
10.9% |
2.4% |
|
Phillip Morris International (NYSE:PM) |
***** |
$103.12 |
11.1% |
4.3% |
|
Procter & Gamble (NYSE:PG) |
***** |
$206.45 |
9.5% |
2.4% |
|
Southern (NYSE:SO) |
***** |
$29.04 |
7.1% |
4.5% |
Source: Motley Fool CAPS, as of Sept. 23.
One criterion for choosing these stocks is that they are no more than 15% below their 52-week highs. This may seem a counterintuitive stance, because it's generally better to buy stocks cheap. But, in this environment, the fact that these stocks have already shown they can perform in a down market might be worth a few dollars in stock price.
These stocks aren't recommendations, but rather a starting point for further research. Here's more detail on a few of these ideas.
Johnson & Johnson: true blue with a future
This diversified health-care giant is the epitome of a blue-chip stock. Here are some reasons why it qualifies:
- It's 123 years old.
- It has more than $191 billion in market cap.
- It operates in 57 countries.
- It has recorded 75 straight years of sales increases.
- It has offered investors 46 straight years of dividend increases.
- It sports a credit rating of AAA.
The stock has been a long-term winner. In fact, $1,000 invested in July 1980, with dividends reinvested, would be worth more than $75,000 as of the end of last month. In terms of the future, international growth and increased health-care spending are undeniable trends that play into J&J's wheelhouse. It operates globally and is the world's largest medical-device company and its sixth-largest pharmaceutical company.
The choice of a new part of the world
Pepsi has a return on equity of almost 36%, a 19% five-year dividend growth rate, and a history of steady stock performance. Growth has been consistent and predictable.
The most growth in the future should come from overseas, where Pepsi does 40% of its business. The company has been investing in rapidly growing emerging markets with expanding consumer bases. In fact, it's investing $500 million in India and expects to triple revenue from that country alone in the next five years. The company is also active in Brazil, China, and Russia. Success in these areas could add an element of rapid growth to help offset its slower pace in the U.S.
We all have to brush our teeth
Companies that provide consumer staples, including Colgate-Palmolive and Procter & Gamble, have held up fairly well is this tough market. Colgate has some of the world's most dominant brands in oral and personal care, home care, and pet nutrition. Its stock has fallen about 4% year to date, while the S&P 500 is down by much more -- about 17%. The company has a whopping 72.4% return on equity, too. CAPS All-Stars are overwhelmingly in favor of this company -- they give it 260 outperforms, compared with only four underperforms.
Since the company does a lot of its sales overseas, a rising dollar could hurt revenue going forward. However, falling energy and commodity prices could help to offset those effects.
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 reason 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!
