Blue Chip Stocks

A blue chip stocks is the stock of a well-established company having stable earnings and no extensive liabilities. Many of the blue chip stocks pay normal dividends, even when business is faring worse than usual. They are valued by investors looking for relative safety and stability, though prices per share are usually high. Generally, these stocks are perceived to offer reliable returns, low yield, and low risk. Many blue chips are components of popular indices, such as the Dow Jones Industrial Average and the S&P 500.

Blue chip stocks can also be defined as companies whose stocks have large market capitalization values.

The term "blue chip" is also generally used to describe collegiate athletes who are being targeted for recruitment (drafting) by professional sports teams. "Blue chip" players proved themselves to be amongst the best at their respective positions in their sports and are more sought after by professional teams than other players.

Blue Chip

A "blue chip" is the nickname given for a stock that is thought to be safe, in excellent financial shape and firmly entrenched as a leader in its field. Blue chips generally pay dividends and are favorably regarded by investors. Wal-Mart, Coca-Cola, Gillette, Berkshire Hathaway and Exxon-Mobile are some of the examples of blue chips.

Blue-chip stocks back in favour

The sharemarket dipped on Friday despite market heavyweight News Corp clawing back ground after a huge sell-down of the stock on Thursday.

The benchmark ASX 200 index closed 4.3 points lower at 3529.2 - up just 1.5 points on the week - while the All Ordinaries index closed down 1.8 points to 3523, a loss of 0.30 points on the week.

FW Holst & Co adviser Michael Heffernan said trading was lacklustre overall despite some standout performances. "One is the fact that turnover today was a massive $5 billion day ...," he said.

"Rio and BHP had good days on the back of good commodity prices overnight, especially copper and zinc - and Rio's announcement of China deals."

"It seems like all the old blue chips are finally gaining favour again. AMP was another big mover today," he said. "Resources stocks dominated activity in terms of rises."

Product for the Wall Street sales machine

The problem with these popular blue chip stocks names is that once a stock is on Wall Street's radar, it gets turned into "product" by the Wall Street sales machine. Stocks like these are always "buys," never "sells." They become the target of legions of analysts who, whatever the opinion they issue, keep the stock in the eye of the buying public. The effect is to push the price-to-earnings multiple ever higher until exhaustion sets in.

Look through the most widely held list, and you'll see a solid dozen stocks that have been lousy performers in recent years simply because their price-to-earnings ratios got so high that the stocks has needed to tread water in price while earnings grew so that the ratios could return to earth. With some solid ground under its feet, a stock price will eventually get moving upward again. In the meantime, those years of underperformance surely mean that a stock such as Microsoft (MSFT, news, msgs) or Pfizer (PFE, news, msgs) doesn't provide the consistency that investors look for in a blue chip. (Microsoft publishes MSN Money).

All of that is why I went looking for the qualities that investors want in blue chips among stocks that aren't yet on the very top of Wall Street's product list.

Let's go through the rules of this Stealth Blue Chip screen again for those who have come in late. (My apologies, but we don't have all the data you need to run this screen on MSN Money, so you won't be able to duplicate my list at home.)

To make the first cut:

* A stocks market capitalization had to exceed $288 million. That market cap, which puts the stock in the top half of all stocks by market capitalization, makes sure the stock is liquid enough for an exit, if one is necessary.

* At the same time, the stock's market capitalization had to be less than $10 billion. I do that to find stocks that are flying below Wall Street's radar. Don't worry: You're not missing out on many big-cap blue chips because of this requirement. Only two stocks with market capitalization above $10 billion get past the other requirements of this screen: Stryker (SYK, news, msgs) and UnitedHealth Group (UNH, news, msgs).

* Annualized earnings per share growth had to be above 10% on average for the last three years. In addition, the company had to show positive earnings growth per share in each of the last four years. This last requirement is a killer, but it does find stocks of companies that grow year in and year out. That's the kind of consistency I'm looking for in a blue chip of any size.

* Annual returns from the stock had to be in the top half of all stocks for each year stretching back to 1998. And, in the very tough year of 2002, the stock couldnt show a loss of more than 13%. That would put the shares in the top quarter of all stock performance that year.

* For the year to date, the stock's return had to be above a negative 2.6%. That would put its return among the top half for all stocks in 2005 so far. Finally, the stock had to be in the top-performing quartile in total return for all U.S. stocks over the last five years.

* After that, I did stock-by-stock due diligence on the 63 stocks that passed this screen. In my due diligence, I looked for the stocks of companies with the potential to sustain the outperformance of the past for the next five years. If the record of the past five years was built on conditions, such as rapidly falling interest rates, that seemed unlikely to be repeated over the next five years, I took the stock out of the running.

Five of the stocks on the 2004 Stealth Blue Chip list didn't make the cut this year. Dropping off the list were Affiliated Computer Services (ACS, news, msgs), Brown & Brown Inc. (BRO, news, msgs), Cuno (CUNO, news, msgs), Kinder Morgan Energy Partners (KMP, news, msgs) and Main Street Banks (MSBK, news, msgs).

Blue-Chip Specials

Everythings gone sky-high this past year in the market: chip stocks, speculative small-cap stocks, smokestack stocks, biotech stocks, even beaten-up telecoms. Everythingexcept quality. In fact, I cant recall a moment when you could buy blue-chip stocks, classic long-term investment plays, at such dirt-cheap prices. The biggest and the best, in fact, are the only real bargains left in the market after the historic recent run weve had. History teaches us that quality is almost never more cheaply bought than junk, so I have to believe that the bizarre disparity between low-quality, speculative, sure-to-flame-out single-digit stocks and high-quality, well-run, well-managed institutions will soon revert to the mean. When it does, there will be huge money made the old-fashioned way, by buying and holding stocks like the following five that the markets virtually given up on in its endlessand, ultimately, futilesearch for the best nanotechnology-powered, cure-for-Alzheimers, voice-over-Internet wireless plays.