Business World

Brutal market activity has ravaged the ranks of blue chip stocks.

As newcomers enter this fraternity, some of the old guard has lost its membership while others are capitalizing on the financial meltdown.

The virtues of stocks in a number of industries have become more visible as the blue chip ranks have thinned. Up-and-comers include insurers Ace Ltd. and Aflac; handset chipmaker Qualcomm; food-service provider Sysco; and industrial manufacturer Emerson, based in Ferguson, Mo.

They replace the likes of Fannie Mae, Freddie Mac, AIG, Morgan Stanley, Wachovia and General Motors, once mainstays of elite portfolios. Even General Electric, Citigroup and Pfizer have lost some of their luster.
"A reputation takes a long time to build and is easy to lose," said Mark Adelman, portfolio manager of the $47 million Westcore Blue Chip Fund in Denver. "Some stocks once considered blue chips are now on the ’suspect’ list, while others have proven they’re blue chip."

JPMorgan Chase and Wells Fargo have taken advantage of the subprime debacle to become even mightier blue chips. Companies such as IBM, Intel and American Express also managed to maintain their trustworthy aura.

Worth the bet?

The term "blue chip" comes from the game of poker, in which the blue chips have the highest value, yet these are the stocks favored by conservatives rather than gamblers. They represent large companies with widely accepted products, good credit quality and low stock volatility.

However, this doesn’t mean investors should buy into these companies without looking into their financial statements.

"One has to be much more cognizant of balance sheets of companies than even one year ago," said Steven Check, editor of The Blue Chip Investor newsletter and portfolio manager of the $20 million Blue Chip Investor Fund in Costa Mesa, Calif. "There could be something bad hidden somewhere."

DON’T MISS OPPORTUNITIES

There is renewed focus on the management’s competence and track record, Adelman said. Investors must think carefully about what stocks they pick, yet keep in mind that they’ll miss a big opportunity if they wait too long, he said internet payday loans.

One new blue chip is Ace Ltd., a global insurance and reinsurance company that has strengthened its balance sheet and weathered the storms in recent years, said Adelman. Another he likes is asset manager Invesco Ltd., which has hired new management and improved its business while remaining an inexpensive stock in light of its franchise and growth opportunities.

Some tech stocks that lost blue chip status in the bursting of the tech bubble have made a comeback, Adelman said, noting Qualcomm and data network giant Cisco Systems in particular.

Stock prices have become detached from actual businesses, Check said, yet quality companies will at some point again reflect their strength.

Emerson, with a broad range of industrial business, has had solid earnings for a long time and plenty of free cash flow, said Check. Supplemental insurer Aflac shouldn’t be disregarded simply because it is a financial stock, he said. He lists drug store chain Walgreen as another new blue chip.

BLUE CHIPS CAN FADE

"Just because a company is a blue chip doesn’t mean it is always going to be one," said Paul Nolte, investment director of Hinsdale Associates in Hinsdale, Ill. "Look at its last five years of earnings, see how much debt it has, see if its dividend has risen over time and whether it has a low relative valuation."

Many stocks are inexpensive and that means opportunities, said Nolte. Avoid firms whose debt, while not actually indicating imminent failure, could nonetheless limit future ability to do business, he said.

Nolte has elevated Sysco, PepsiCo and Coca-Cola to the top echelon of blue chip stocks because no matter what happens in the economy, consumers will continue to buy their products.

andrewinv@aol.com

2008, TRIBUNE MEDIA SERVICES INC.

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