Stocks Still Upbeat, and Blue
Blue chips dominate a market poised to break 8000
NEW YORK — Blue still beckons as the color of choice in the stock market, now, and possibly right into 1998.
Blue chip stocks have been the top guns for the past two years, blazing the path as the stock market hits one record after another.
Blue chip companies are the largest and generally most stable companies in America - General Electric, Coca Cola, Microsoft, General Motors, McDonald's, etc. They dominate the Dow Jones Industrial Average and the Standard & Poor's 500 index, common yardsticks of stock market performance.
Individual investors, portfolio managers, mutual funds ... they can't get enough.
But with the Dow now poised to break 8000, perhaps this week, is it time to lose the blues?
Fortune Magazine, in its July 21 issue, says some careful selling of blue chips may now make sense. And while some experts are urging caution, within the front offices of many investment houses, blue is still the color of choice, for three reasons.
International presence. Most blue-chip companies have strong overseas operations, which let them capitalize on global growth and should keep profits growing into 1998.
Strong balance sheets. Most have manageable debt and could weather an economic downturn.
Consumer friendly. They are largely consumer-oriented firms, and consumer confidence is strong.
"Valuations are higher than ever," says Alfred Goldman, chief market analyst for investment house A.G. Edwards & Sons, St. Louis. "Historically, the average price/earnings ratio is around 15 1/2; today, it is around 19 times earnings. Yes, the P/E's are high, but deservedly so," he says.
The price/earnings ratio is a firm's stock price divided by its profits. Investors use it to compare a company to the overall market and others in the same industry.
"Money," says Goldman, "will continue to flow to companies that can grow earnings," which means the blue chips.
"Selectivity is the key to good investing, and a lot of blue chips are still looking very promising," says Guru Baliga, portfolio manager at American Express Financial Advisors, Minneapolis.
Blue chips still make the products people want, he says, and, if the economy slows, investors like their "bullet-proof earnings."
"We've heard it again and again, that using historical data, fundamentals are too high and you should get out of blue chip stocks," says Larry Wachtel, at Prudential Securities. "But if you'd done that two years ago, you would have missed out on market gains of trillions of dollars. Barring any major change in underlying economic fundamentals," he sees no compelling case to raise the red flag on blue chips.
Arnold Kaufman of Standard & Poor's also favors blue chips, but notes that their strength feeds itself. "Money flows into index funds, which in turn goes to buy large companies, which drives up their stock prices, which attracts more investors."
Kaufman suggests a slight change in portfolios to include carefully selected small and mid-sized companies.
The only problem, he says: "If the market were to drop, because of difficulties in the large company sector, small and mid-cap companies would probably be hurt as well."
What the Experts Say
"The economy and the stock market look good, right through 1997. What you've got is something like a child going into a swimming pool. The water seems too cold. But the child (like investors) doesn't want to leave the water to miss the party."
- Jos Rasco, Hoenig & Company, Rye Brook, N.Y.
"Stocks are in a classic late-cycle blow off analogous to 1929 and 1987. We're in that blow-off now. The 'eye of the storm' always looks calm." The S&P 500 could climb near 980 from its current 916, with a possible "gut wrenching" decline of 20 percent in the months ahead.
- David Shulman, Salomon Brothers, N.Y.
"We're still in a bull market. Economic fundamentals remain positive. The trend is for stock prices to move higher, maybe to 8600 to 8800 points on the Dow... for now, nothing on the horizon looks threatening."
- Alfred Goldman, A.G. Edwards & Sons, St. Louis