Do Blue Chip Stocks Even Exist Anymore?

On Friday, we saw Citigroup (C) do a recap and dilute the common stockholders significantly and we saw General Electric (GE) cut their dividend by 2/3 to conserve cash. Both stocks are trading at below $10/share and are at fifteen year lows. There's a significant chance that the common stockholders on Citigroup will end up with nothing if the bank is nationalized. And GE is facing a huge debt maturity next year that could cause a similar outcome for its shareholders. And what about General Motors (GM)? That's another potential bankruptcy looming. The NY Times quoted an automotive consultant yesterday about GM:

“G.M. can’t raise more capital in the private markets, it can’t influence demand and it can’t adjust its cost structure enough in the short-term,” Mr. Casesa said. “There is no economic solution, only a political one.”

What do Citigroup, GE, and GM have in common? They are "blue chip" stocks and members of the elite Dow Jones Industrial Average. There are 30 stocks in DJIA and they are the biggest and, in theory, the strongest companies in America.

But the past six months have taught us that no company is bulletproof and just because a stock is a "blue chip" doesn't mean it is safe.

In fact, we are learning the opposite. Here's the chart of the Dow since Nov 1, 2008 (click to enlarge):

The Dow is down 25% since Nov 1, 2008 and is ~7% below the November lows.

Here's the chart of the NASDAQ since Nov 1, 2008 (click to enlarge):

The NASDAQ is down 20% since Nov 1st and is 7% above the November lows.

Six months doesn't mean all that much, but I think its instructive that the "strongest" companies in America have underperformed their smaller brethren and I think this trend will continue as we work our way out of the mess we are in.

I've said this before and I'll say it again. This economic crisis is not limited to banks and housing. We are witnessing a "sea change" as my father in law called it today. Businesses that were built in the 19th and the first half of the 20th century are finding their underlying fundamentals challenged by a new economy that is global and driven by information and technology. Businesses that were built at the tail end of the 20th century and even in the 21st century are faring much better.

So be wary of "blue chips". They aren't such a sure thing anymore.

Comments

[xsellside:]

Good article, but here's some food for thought. I think that unlike prior market cycles, large cap stocks may lead small cap stocks in an eventual rebound. Historically, small caps lead bull markets (rules of thumb are sort of out the window these days though). The risk bubble popped, but the safety bubble might deflate. As such, one could make a case that investors may flock to "safer" large cap stocks first and then "riskier" small cap stocks.

Mar 01 01:18 AM

[John Petersen:]

It may be a pet peeve, but talking about "dilution" in the context of a company that has destroyed the net tangible book value of its common equity is absurd. As long as the cash per share coming in the door equals or exceeds the net tangible book value, there is no dilution. Value destruction is a terrible thing to witness. It's also the price shareholders pay for imprudent management decisions. But to put it in terms that everybody can understand, you don't dilute a beer by adding a shot of Jack Daniels.

Mar 01 01:59 AM

[Kem Cho:]

Fred Wilson should make a list of what he thinks are the Blue Chip stocks - just not generalize

Mar 01 11:06 AM

[Ricard:]

I agree with some of the comments. This analysis is somewhat simplistic. If you were to ask me what was a blue chip, I'd respond differently than just "DJIA" or top ten market caps.

To me, INTC and CSCO are the new blue chips. These companies have been around for a while, have excellent cash flows, are not reliant on an iconic head (BRKA, AAPL), low debt, and in INTC's case, a good dividend. I see these (especially INTC) as a good buy-and-hold stock.

Mar 01 12:26 PM

[Subhankar:]

The report about the death of blue chip stocks is highly exaggerated!

Mar 02 03:56 AM