High Yield Blue Chips Set to Rally?

by: Joe Kunkle

The recent sell off in treasuries has given clues to the fact that money is moving from "safe" treasuries to risky investments, such as stocks, as the market continues to gain ground with clarity on the US coming out of the recession later this year. The breakdown of the VIX at 35 was a sign of stablization and fear was coming out of the markets, allowing this rally to have legs.

I came across the action in the Barclays High Yield Fund (NYSEARCA:JNK) Monday and noticed that it had broken past triple resistance and had done so on consecutive days of unusually strong volume. The fact that money is going into High Yield funds further supports the notion that an economic turnaround is underway and the worst is behind us.

Companies such as Community Health (NYSE:CYH), DirecTV (DTV), Citi (NYSE:C), Aes (NYSE:AES), GMAC, MetroPCS (PCS), and Windstream (NASDAQ:WIN) are some of the larger components offering high yield securities in this fund.

The main risk in investing in high yield securities is that the underlying company goes bankrupt or operations slowdown to the point that loan covenants are broken, and interest payments are not able to be made. The amount of money flowing into this fund is also showing the belief that credit markets are thawing and lending is easing.

With a record amount of cash still on the sidelines, waiting to put money to work in the equity market, subtle signs such as the action in the Barclays High Yield Fund are signals that we are not going to test the lows, and downside in the markets is now clearly limited, while the upside could provide an opportunity of a lifetime for long term investors looking for "comeback" stocks.

This rally is not just a bear market rally, and although recent data suggests that "junk" stocks have led the rally, there are many signs that blue chips are ready to take this market higher, since investors are willing to put money to work in high yield "risky" assets, I am sure that the abundance of blue chip stocks yielding 6% or more dividends will be the next group to lead a market rally, especially considering that most dividend cuts and restructuring actions have taken place already.

A screen for blue chip stocks yielding 6% or more, with a forward P/E less than 15, and Debt/Equity < 1 include:

  • AstraZeneca (NYSE:AZN) 7.86%
  • BCE Inc (NYSE:BCE) 6.35%
  • Bank of Montreal (NYSE:BMO) 6.38%
  • Bristol Myers (NYSE:BMY) 6.11%
  • British Petro (NYSE:BP) 7.15%
  • Boardwalk Pipeline (NYSE:BWP) 9.01%
  • CenturyTel (NYSE:CTL) 9.04%
  • Duke Energy (NYSE:DUK) 6.42%
  • Enbridge (NYSE:EEP) 10.63%
  • Alliant Energy (NYSE:LNT) 6.18%
  • Merk (NYSE:MRK) 6.23%
  • NuStar (NYSE:NS) 8.01%
  • Telecom of New Zealand (NZT) 7.84%
  • Reynolds (NYSE:RAI) 8.51%
  • SK Telecom (NYSE:SKM) 8.51%
  • AT&T (NYSE:T) 6.47%
  • Indonesia Telecom (NYSE:TLK) 9.59%

Disclosure: No Holdings in These Names