What’s Putting Stock Investors in a Blue-Chip Mood This Year
In the stock market, 1995 is fast shaping up to be the year of the American blue-chip company.
After taking a back seat to smaller stocks and to foreign stocks for much of this decade, U.S. multinational companies like General Electric, McDonald’s and Procter & Gamble are leading this year’s surprising market surge.
That was apparent last week, when the Dow Jones industrial average--the bluest of the blue-chip stock indexes--closed above 4,000 for the first time, ending Friday at a record 4,011.74.
The Standard & Poor’s 500 index, which includes all 30 Dow stocks and 470 other major U.S. stocks, also hit record highs last week.
In contrast, no other broad U.S. stock index has yet retaken its 1994 peak. And overseas, virtually every major market is trading far below its highs. Tokyo stocks hit new 14-month lows today. And in London, the FTSE-100 share index--already 14% below last year’s peak--is likely to fall further in the wake of the collapse of Britain’s giant Barings investment bank, a debacle that also will slam the many Third World markets in which Barings actively invested.
Is the American blue-chip stock’s resurgence a fluke? Many investment pros don’t think so.
“Global investors are rediscovering the discrete charms of these U.S. stocks,” says James Solloway, research director at investment firm Argus Research in New York.
Indeed, there’s an increasingly popular thesis on Wall Street that goes like this: Instead of taking the political, economic and currency risks involved in investing directly in foreign stocks--the hot trend of 1993 and ‘94--why not just buy shares of the highest-quality U.S. multinational giants?
In U.S. blue chips you get proven companies that operate everywhere on the planet, are extremely competitive and are relatively safe investments--certainly a lot safer than Mexican “blue chips” have turned out to be, anyway, as that market has crashed with the peso’s shocking devaluation.
Best of all, most U.S. multinational stocks pay real cash dividends, and many are still trading at prices that are reasonable compared to their underlying earnings per share. So if the market as a whole drops from here, the blue chips arguably have a better safety net under them than many smaller U.S. stocks or foreign issues.
The blue-chip multinational theme has been embraced by a number of widely followed Wall Street investment strategists who see the global scope of America’s premier companies as the solution to two challenges--how to avoid being hurt by a pronounced U.S. economic slowdown and how to tap into overseas growth without taking undue risk.
Prudential Securities chief strategist Greg Smith, for example, believes that U.S. consumers’ spending patterns are on the cusp of a deceleration that will last for years, a function of an aging population and slower rate of new household formations.
“The only profitable way out of the eventual cyclical and secular slowdown of consumer spending in the United States is to focus on global companies,” Smith says--and specifically on firms that “already have a significant, integral presence in most of the rest of the world.”
At brokerage Dean Witter Reynolds, meanwhile, strategist William Dodge has for months been urging clients to “think globally and then invest locally” in established U.S.-based companies that derive much or most of their sales from overseas.
“It’s timely and it’s common sense,” Dodge says. “We’re not saying you shouldn’t invest (directly) in overseas markets, but we’re reminding people that you can get a very good slice of that overseas action by investing right here.”
Of course, touting blue-chip stocks may seem so obvious as to be unworthy of the time and effort of Wall Street’s high-paid strategists. But the truth is that U.S. multinational investing has gotten short shrift in recent years as institutional and individual investors focused on more exciting market sectors.
The bond market, for one, was a speculator’s paradise from 1991 through 1993, as interest rates plummeted. In that same three-year period, U.S. small-company stocks rose much faster than blue-chip issues, further diminishing the interest in big stocks.
Then in mid-1993, foreign stock markets suddenly caught Americans’ fancy, leading to an unprecedented surge of cash into foreign-stock mutual funds that lasted through 1994.
The lack of attention paid to many U.S. blue chips showed up clearly in the performance of the S&P; 500 index. From the end of 1991 through the end of last year, the S&P;’s value increased a mere 10%--or about 3.3% a year.
Yet while the S&P; rose in slo-mo, the earnings of the companies in the index were rising at double-digit rates, on average. Goldman, Sachs & Co. calculates that S&P; firms’ aggregate operating earnings (that is, results before one-time charges) rose 11% in 1992, 16% in 1993 and 14% last year.
The result: Many blue-chip stocks today sell for prices that are lower, relative to earnings per share, than in 1992. Shares of semiconductor giant Intel, for example, have jumped 70% since the end of 1992, but the company’s earnings have risen even faster. So the stock’s price-to-earnings multiple, or P-E, is 11 based on estimated 1995 earnings, down from an average P-E of 12 in ’92.
Similarly, the overall S&P; index P-E, which was 20 in 1992, now is 13 to 15, based on 1995 estimated earnings.
That P-E “shrinkage” reflects in part the rise in interest rates last year and the fear that the U.S. economy is nearing the end of its cycle of expansion. Investors naturally begin to pay less for stocks, relative to earnings, as interest rates offer more competition and as economic growth slows.
The bullish argument for many blue chips is this: Precisely because they are global, their earnings power won’t be hurt as much as that of U.S.-dependent firms if the domestic economy slows. Strength in Europe, for instance, may offset U.S. weakness.
If true--and especially if interest rates remain stable or fall this year--the multinationals’ stocks deserve to sell for higher P-Es, some fans contend.
Stan Nabi, investment strategist at Bessemer Trust Co. in New York, notes that the S&P; index’s average P-E since World War II has been about 14, but that companies that promise consistent earnings growth usually sell for hefty premiums to the average.
Nabi argues that the market hasn’t been pricing many U.S. blue chips fairly, considering the efficiency and productivity gains the companies have achieved after years of painful restructurings.
“Think about it: In the late 1980s it looked like we were losing our semiconductor industry, our telecom industry, our auto industry, . . . now we are well ahead of the global competition in all of those fields,” he says.
Yet the P-E of the U.S. stock market overall today is roughly in line with P-Es of European markets, analysts note. “Is the U.S. market not worth a multiple greater than (those) markets?” Nabi asks rhetorically. “I think it is.”
Dean Witter’s Dodge agrees. “Everyone is still in denial. No one wants to believe that America is back” as the dominant industrial competitor, led by its blue-chip giants, he says. But he thinks minds will gradually be changed--and that a Dow of 5,000 will arrive sooner rather than later as investors pay up for blue chips.
More cautious market pros, however, doubt that the Dow’s 4.6% rise so far this year (and the S&P; index’s 6.3% gain) mark the start of an advance that will sharply raise the multinationals’ P-E multiples.
Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York, sees blue-chip stocks as already priced quite fairly, given the uncertainties of the global economy and the age of the bull market. “It seems to me this is not the beginning of a big upward leg” for multinational issues, he says.
Still, on Wall Street, stranger things have happened. Investors who like the blue-chip story can mull three final thoughts:
* Even if the bulls are wrong, what’s the worst that can happen to a long-term investor who buys premier U.S. multinational stocks at historically average P-Es? By definition, just about the least speculative thing you can do with your stock money is pay fair prices for a portfolio of the nation’s most successful companies.
* The Republican Congress stands to be a blue-chip industrial company’s best friend--which may be part of what the market is saying so far this year.
* Foreign investors have ignored U.S. stocks for years. But if the dollar stabilizes or threatens to rise, and foreigners begin aggressively buying U.S. securities again, “what will they buy?” asks Charles Mayer, manager of the Invesco Industrial Income fund in Denver. “The names they know--the blue-chip stocks.”
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A Stack of Blue Chips
Here are some of the multinational companies favored by Wall Street strategists. The 1992 P-E was the stock’s average price-to-earnings ratio for that year. The 1995 P-E is based on estimated 1995 earnings per share. Many of the stocks sell for less today, relative to earnings, than they did in 1992, which reflects Wall Street’s fears of slower earnings growth ahead.
52-week Fri. ’92 ’95 Div. Stock high low close P-E P-E yield Citicorp $47.75 $36.00 $44.75 13 7 2.7% Coca-Cola 54.88 38.88 54.75 29 24 1.6% Emerson Electric 67.13 56.13 65.88 17 16 2.6% General Electric 56.00 45.00 54.75 16 14 3.0% Intel 80.75 56.00 78.50 12 11 0.3% Mattel 23.50 16.50 22.63 17 15 1.1% Merck 42.75 28.13 42.38 23 16 2.8% McDonald’s 34.00 25.50 33.50 17 18 0.7% 3M Co. 57.13 46.38 54.50 17 15 3.5% Mobil 89.25 72.00 87.38 20 15 3.9% Motorola 64.75 42.13 55.88 20 17 0.7% Procter & Gamble 67.00 51.25 66.75 17 18 2.1%
All stocks trade on NYSE except Intel (Nasdaq). Source: Value Line Investment Survey
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Blue Chip Funds: A Sampling
Here are some mutual funds that typically invest a significant share of their assets in U.S.-based multinational companies. All of the funds are among the top-ranked in their class, as scored by fund-rater Morningstar Inc.
Total investment return: (800) Fund ‘89-’94 ’95 phone Dodge & Cox Stock * +59.0% +6.7% 621-3979 Vanguard Index 500 * +50.4% +6.4% 662-7447 Dreyfus Disciplined Stock * +59.4% +5.2% 645-6561 IDS Strategy Equity * +53.1% +5.0% 328-8300 Investment Co. of America +52.4% +4.6% 421-4120 Invesco Industrial Income * +67.2% +4.6% 525-8085 Columbia Common Stock * NA +4.6% 547-1707 AARP Growth & Income * +61.3% +3.7% 322-2282 Average U.S. stock fund +55.5% +4.2%
NA -- fund didn’t exist for entire period * indicates no up-front sales charge, though redemption fees may apply ’95 return through Friday Source: Morningstar Inc.; Lipper Analytical Services
