If there is an asset class that is now unloved, surely it has to be the large-cap U.S. blue chips like General Electric (GE), Johnson and Johnson (JNJ) and Wal-Mart (WMT). BusinessWeek magazine even did a cover story posing the question: “How long will the stocks of America’s largest companies remain weaklings on Wall Street?”
As an investor who is over-weight in the bluest of the blue chips (I own shares in Altria Group (MO), Anheuser-Busch (BUD), Home Depot (HD), General Electric (GE), AIG (AIG) and Pfizer (PFE)), you would think that such a cover story would keep me sleepless at nights. On the contrary, one of the lessons of the crash in technology stocks, is that there is very little money to be made buying the same thing that everyone else is buying. To paraphrase Warren Buffett, an investor should try to buy stocks that will be priced like flowers tomorrow but are priced as weeds today.
My thesis for the overweight position in the blue chips is very simple: many of these stocks are trading at the low end of their historical valuation and in many instances are trading at lower valuations than the market as a whole. If this magazine covers turns out to be another contrarian indicator, maybe it is time for the blue chips to outperform other asset classes.
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5 responses so far ↓
1 Anonymous // Apr 10, 2006 at 7:47 pm
Investing in the Unloved…
Could Business Week’s Blue Chip Blues cover turn out to be another contrarian indicator? Canadian Capitalist think maybe it is time for the blue chips to outperform other asset classes….
2 Top Stories on Fat Pitch News - Fat Pitch Financials // Apr 15, 2006 at 4:52 am
[...] Investing in the Unloved [...]
3 » Carnival of Investing on Blueprint for Financial Prosperity // Apr 16, 2006 at 7:24 pm
[...] The Canadian Capitalist talks about how investing in the blue bloods of the blue chips (GE, Home Depot, Wal-Mart) might be a smart move if you believe that the latest BusinessWeek cover story can be a contrary indicator of a turnaround in the sector. [...]
4 Jay Walker // Apr 21, 2006 at 9:34 pm
I agree with your overall thesis; however, you, like I, have the currency issues to consider. i.e. the possibility of continuing deterioration of the US dollar. Not an issue to be taken lightly, in my view, as I think it could erode 5-10% from returns over a rather lengthy period.
Jay Walker
The Confused Capitalist
http://confusedcapitalist.blogspot.com/
5 Canadian Capitalist // Apr 22, 2006 at 7:48 pm
Jay: Thanks for your comments. Yes, the USD could deteriorate further. But I am not so concerned about it because over the long term (20+ years) nobody can predict currency movements. Also, a lot of big blue chips have significant income from international markets and could do very well if the USD falls.
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