The Big Easy: A Basket of 10 Blue Chips for Uncertain Times

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 |  Includes: GE, INTC, JNJ, KO, MMM, MSFT, PFE, PG, T, WMT
by: Brett Korsgaard

As the economy continues to shuffle along at a 1-2% pace, stocks continue to stay rangebound after regaining much of the value that was lost in the post Great Recession era. Many of the mega-cap stocks, which dominate the S&P 500, have reported generally good earnings. These mega-cap "Blue Chip" stocks in particular have seemed to hold up well when the market has swooned. Bad news from the developed world and the U.S. keeps coming but they continue take most bad news in stride. While earnings continue to improve and markets waver, earnings for these dominant franchises have been steadily improving. This is good news for investors as equities with international franchises, excellent transparency and decent dividend yields can be had at reasonable prices.

“The Big Easy” Portfolio:

Company

Symbol

Comments

Price

As of 8/1

P/E

Dividend Yield

General Electric

GE

Growth prospects improving, especially for industrial businesses. 13% earnings growth in latest quarter.

17

15

3.4%

Pfizer

PFE

Diversified big pharma with incremental quarterly improvements in sales and margins forecasted

18

19

4.2%

Intel

INTC

Refresh cycle for PC’s and Servers beginning in earnest. Intel chips will have a seat at the table in mobile OS due to scale.

22

10

3.8%

Wal-Mart

WMT

Largest retailer has ample International growth to look forward to. Compression in PE indicates low expectations

52

12

2.8%

Coca-Cola

KO

Higher prices and International volume growth likely to keep this issue buoyant.

67

13

2.8%

Microsoft

MSFT

Diversified software giant, cheap valuation and growing entertainment, communication offerings

26

10

2.3%

AT&T

T

Slowing landline, but wireless and internet offerings strong and growing. 5.7% dividend

29

8

5.9%

MMM

MMM

Global growth and product portfolio that is gaining traction in the emerging markets. Exposure to Industrial applications.

85

14

2.5%

Proctor & Gamble

PG

A leader in consumer packaged goods that should continue to compete well in emerging markets.

61

16

3.4%

Johnson & Johnson

JNJ

Global Power in diversified consumer and healthcare products. Beneficiary of aging demographics in the west. Moving forward after product issues.

63

15

3.5%

Click to enlarge

Even if the economy continues to trickle along, this is a time when large-caps historically outpace small and mid-cap issues which usually perform better at the onset of an economic recovery. Granted, this seems to be a recovery that truly never gets out of bed. Sooner or later economic growth in core U.S. markets may begin in earnest, which should provide more juice to these dominant franchises. If growth does not materialize in the developed world, there will likely be fewer surpises as more and more revenue gets booked in higher growth emerging markets.

For investors looking for decent risk adjusted returns, it is not a bad time to create a portfolio featuring this diverse set of Blue Chips. For an investor with at least a medium term time horizon (4-5 years) and a moderate risk profile, an allocation of up to 40% of your investable portfolio in large-caps certainly appears reasonable. Most of these stocks sport relatively low beta ratios which is reassuring when the markets get choppy. That dividend yields are increasing and that interest rates on risk free savings in bank accounts or CD’s is about a measly 1-2% is even more reason to invest in a portfolio such as this.

Of course, the other big advantage to holding a basket of mega-cap stocks is exposure to emerging markets. Since these companies have the scale and global reach to derive upwards of 60% of their gross revenue from international markets, this performance serves as a hedge to the slower growing U.S. economy. Their scale enables them to make significant investments in markets like China, India and Brazil. GE now derives 50% of revenue from international markets in 2011; way up from the 30% just a few short years ago. It is obvious at this juncture that investors need to have exposure to fast growing emerging markets, but they need not invest in companies based in those countries with higher growth rates. Emerging markets can be extremely volatile and with current concerns over the true quality of reporting and oversight (particularly in China as of late) it just makes sense to gain exposure through large multi-nationals.

How do you get exposure to mega-caps? The “Big Easy” portfolio is an example of how to gain exposure without paying the fees inherent in most large-cap mutual funds. Nor does one need fifty companies in a portfolio to get diversification. Keep it simple and ride on the tails of dominant franchises which feature room to grow in new markets, dividends to pay and above all else, a good night's rest.

Disclosure: I am long GE, INTC, MSFT, PFE, JNJ, WMT.