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5 Blue-Chips to Ride Out a Double-Dip - 59718 views
MINNEAPOLIS (Stockpickr) -- According to the market, a double-dip recession is upon us. Finally, on Wednesday, the S&P 500 broke its seven-day losing streak and the Dow avoided its ninth day of losses as stocks finished slightly higher across the board.
The losing streak was the worst we had seen since the 2008 financial crisis. Being the forward-looking instrument it is, the market is clearly placing bets on consecutive quarters of negative economic growth.
The recent losses were apparently about much more than the debt ceiling debate, which resolved itself by the Aug. 2 deadline. Rightly so, the market cares more about things such as jobs and GDP growth. With weakness in those categories, stocks are likely to struggle. It matters little that corporate earnings are for the most part strong, with many companies increasing future guidance.
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Investor psychology is shot. Individual investors are skeptical, unwilling to get burned by buying high once again. Financial stocks have been horribly weak for most of the year. The recent selling has been marked by weakness in the important transportation sector. Other than gold, there are few places investors can hide.
I suppose that explains why Treasury securities are doing so well. In spite of the threat of a credit downgrade, U.S. government bills, notes and bonds are still considered a safe haven. For those not willing to stomach any sort of risk, there is an alternative. I would recommend blue-chip stocks in this environment.
Given the uncertainty, I like the idea of the strongest being the survivors. These blue-chip stocks are likely to thrive when others struggle. In today’s market, blue-chip stocks are cheap relative to earnings, and sales overseas remain strong and are more valuable assuming a falling dollar. There is plenty to be optimistic about.
Here are five blue-chip stocks to ride out a potential double-dip recession.
Consumer spending fell 0.2% in June following an anemic gain of 0.1% in May and compared with expectations for another 0.1% uptick. The disappointing number, announced on Tuesday morning, was primarily due to persistently high unemployment and wage stagnation. The news helped support the bearish sentiment in the market and is often a harbinger for rough times ahead.
One thing consumers are spending money on -- and at a pretty rapid clip -- is smartphones and tablet computers -- just look at Apple (AAPL) and Google (GOOG), which both delivered stellar earnings reports, sending shares zooming higher. That these devices require a network to operate bodes well for blue-chip Verizon (VZ).
Verizon reported its own strong report on July 22. The company made a profit of 57 cents per share in the second quarter ended June 30, beating the average Wall Street estimate by 2 cents per share. Verizon shares were down fractionally after the report and have held steady during the recent selloff. Since the release Verizon is down 4.3%. The S&P 500 during the same period has dropped by 6.2%.
It may be a small victory to be down less -- after all, the stock is still down -- but owning a blue-chip safe-harbor stock like Verizon is all about protecting capital while generating positive appreciation that properly values earnings and revenue growth. I would buy at these levels.
Verizon is one of TheStreet Ratings' top-rated telecom stocks.
International Business Machines
It is not easy for a company with a market capitalization of more than $200 billion to continue to grow at impressive levels, yet that is what IBM (IBM) does quarter after quarter, year after year. Selling mainframe hardware and augmenting those sales with consulting contracts that produce continuous, recurring revenue has served the company well. So too has a fairly rigid corporate culture of strict dress codes that creates a strong sense of team and brand identity in the market place.
In the most-recent quarter, IBM generated a profit of $3.09 per share, beating the average Wall Street estimate for $3.03 per share. Shares of IBM jumped on the news and have held gains in spite of recent selling in the market. At $178.83 per share, the stock is $3 ahead of where shares were priced prior to the July 18 report.
With the market now in the red for the year, IBM is a great blue-chip stock to own. Shares trading for just 13 times current-year estimated earnings, and profits are poised to grow at a double-digit clip, making IBM cheap at these levels. I would be a buyer.
This blue-chip of blue-chips is deserving of its own classification. If there ever was a must-own stock, no matter the market or economic conditions, Apple (AAPL) would be it. The company can do no wrong.
Multiple demonstrations of innovative ability creating products that sell to monster markets has resulted in Apple's accumulating more cash than the U.S. Treasury as was widely reported during the tail end of the debt limit debate. In its most recent earnings report, the company announced a profit for the second quarter that blew away estimates by nearly $2 per share.
Think about that for a moment. Apple is the single most-watched company on the planet, yet Wall Street missed the mark wildly in estimating profits for the period. That makes three quarters in a row of beating estimates by a dollar per share or more. Investor reaction was a bit ho-hum and predictable.
Apple jumped to $400 per share but has since taken a step back to $392.57 per share. Given expectations, combined with record performance of late, Apple deserves a much higher valuation. Currently shares trade for just 14 times fiscal-year 2011 estimated earnings ending in September. Given that Wall Street expects profits to grow by 17% next year, Apple is the bluest chip of them all and a steal at these prices.
Apple shows up on recent lists of 18 Fundamentally Strong Stocks With Positive Technicals and Cramer's Long-Term-Trend Stocks.
Give McDonald's (MCD) props. The iconic hamburger chain continues to impress. In recent years, the company rebranded itself with its café drinks, attacking the coffee shop chains while staying true to its fast food offerings at low prices. The weakening economy in the U.S. is perfect for value meals and family fare for cash-strapped budgets. In addition, global growth offer great potential for continued expansion of the Golden Arches.
In the quarter ended June 30, McDonald’s reported results that beat Wall Street estimates. The company delivered a profit in the period of $1.35 per share vs. the average estimate of $1.28 per share. That performance has helped McDonald’s stay ahead of the market during the recent spate of selling. Shares are down about 3.4% since the selling began.
McDonald’s trades for 16 times 2011 estimated earnings. The company also pays a dividend of 2.8%. With profits expected to grow by 10% next year, investors are paying a small premium for this blue-chip. Given how the rest of the market is faring, I would pay that premium for this blue chip stock.
Wal-Mart (WMT) has missed a wonderful opportunity to grow its business and crush the competition during the last few years of economic malaise and financial chaos. Its singular focus on low prices made the company uniquely positioned to capitalize on a very weak consumer market. Other discount retail plays such as Family Dollar (FDO) have shined since stocks bottomed in 2008. Shares of Wal-Mart are up only modestly from the bottom.
Be that as it may, the company still has an advantage as the new economic realities set in. It is not too late for Wal-Mart to pounce. At a minimum, should the economy indeed double-dip, it should hold up relatively well while other companies struggle. In its most-recent quarterly report for the period ended April 30, Wal-Mart beat analyst estimates by 2 cents per share.
For the year ending Jan. 31, 2012, the average Wall Street profit estimate is $4.46 per share. That number improves by 10% in the following year to $4.91 per share. Investors can buy that double-digit profit growth for just 11.5 times current-year estimated earnings. Include the 2.8% dividend and you have a good opportunity to buy this blue chip stock on the cheap.
To see these stocks in action, check out the 5 Blue-Chips to Ride Out the Double Dip.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions ins tocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.