The Blue Chips That Can Weather Economic Storms

By Thursday, October 25, 2012

A lot of blue chip stocks have pulled back considerably from their 52-week highs. Among those in the Dow Jones Industrials, Wal-Mart Stores, Inc. (NYSE/WMT) continues to be a powerhouse, trading only three points below its all-time record high on the stock market. Over the last four weeks, the Street increased Wal-Mart’s earnings expectations across the board, including next year’s. And the company, which reports mid-November, is not expensively priced.

Other blue chips in the Dow Jones Industrials that are holding up very well on a relative basis are Exxon Mobil Corporation (NYSE/XOM), Verizon Communications Inc. (NYSE/VZ), The Travelers Companies, Inc. (NYSE/TRV), and The Home Depot, Inc. (NYSE/HD). Still, most blue chips are well below their highs, and this is particularly evident among technology stocks.

I think it’s likely that we’ll now see the stock market drift over the near term. Share prices have come down and so have expectations. With most stocks fairly priced, there is some value in the marketplace but not a lot of it. It’s very difficult to imagine the stock market accelerating in the current environment.

I’ve been an advocate of sticking with existing winners in this stock market. Many blue chip companies have been excellent wealth creators over the last couple of years, and that’s not even including dividends. Many blue chips have excellent balance sheets and, like we’ve heard this earnings season, companies are prepared to weather new storms.

One of the stock market’s best performing stocks has been Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN). This large-cap biotechnology stock sells only one drug, but business is booming for Alexion. (See “The Best Stocks in a Weak Stock Market.”)

Because of the company’s rapid financial growth, it’s not cheaply priced on the stock market. The stock recently went on sale due to the pullback in the broader market; for trader types, it is worth keeping an eye on. The company just reported excellent financial results. Alexion’s stock chart is below:

alexion pharmaceuticals inc stock chart

Chart courtesy of www.StockCharts.com

Generally speaking, I still would hold off on accumulating new positions in this market, even among blue chips. Corporations have been very conservative lately, both operationally and with guidance. But the weak economic performance in the eurozone and China is likely to be most pronounced in the upcoming fourth-quarter earnings season, and this will keep industrial blue chips down for quite a while longer.

The problems facing the stock market aren’t driven by corporations but, rather, are due to outside economic forces hitting Main Street economies. Sovereign debt among the 17 countries using the euro currency just hit a record 90% of the value of their total economy. The headwinds remain large and so does investment risk.


About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 2, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.71%
10-year U.S. Treasury Yield 2.14%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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