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In uncertain times like these, many investors are attracted to the stability and reliability of blue chip stocks.

We covered Ilan Moscovitz of the Motley Fool's The Best Blue Chip selection where he highlights:

  • Competitive advantages as measured by profitability
  • Fortitude as measured by growing sales even in tough conditions
  • Dividend stability keeping the dividends coming no matter what

Ilan ranked companies by these metrics within their sectors, and used the highest-ranked company from each sector.



5-year Average Return on Assets

Operating Margin

1-Year Revenue Growth

10-Year Dividend Growth

Consumer discretionary McDonald's (NYSE: MCD) 13% 30% 8% 27%
Consumer staples PepsiCo (NYSE: PEP) 12% 17% 22% 13%
Energy Apache (NYSE: APA) 11% 49% 40% 21%
Financials T. Rowe Price (Nasdaq:TROW) 19% 46% 21% 15%
Healthcare Stryker (NYSE: SYK) 12% 25% 11% 33%
Industrials Precision Castparts (NYSE: PCP) 14% 24% 17% 10%
Information technology Intel (Nasdaq:INTC) 12% 34% 18% 27%
Materials Nucor (NYSE:NUE) 10% 5% 29% 25%
Telecommunications CenturyLink (NYSE: CTL) 6% 24% 32% 31%
Utilities Exelon (NYSE: EXC) 6% 24% 12% 12%

Today we pick up a follow on article where he asks:

While all 10 of the companies listed above earned the prize for best blue chip in their sectors, could it be that a few under-the-radar companies might be exhibiting superior performance to those blue chips?

It turns out that even when we include thousands of extra candidates, PepsiCo, Apache, Stryker, Intel, and Exelon still came out on top of their respective sectors.

But in five of the sectors, non-S&P 500 companies actually displayed superior numbers. Here are the five names that managed to beat the best blue chips at their own game:



5-Year Average Return on Assets

Operating Margin

1-Year Revenue Growth

10-Year Dividend Growth

Consumer discretionary

Strayer (Nasdaq: STRA)






Texas Pacific Land Trust (NYSE: TPL)






Sun Hydraulics (Nasdaq: SNHY)






Southern Copper (Nasdaq: SCCO)






Atlantic Tele-Network (Nasdaq: ATNI)





We will substitute these players and see how this improves the portfolio and see what conclusions we can draw from this

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 5% 52% 11% 90% 9% 67%
The 10 Optimized Blue Chips For Q4 2011 -5% -15% 19% 54% 12% 33%
The 10 Best Blue Chips For Q4 2011 5% 22% 13% 44% 7% 20%
Retirement Income ETFs Strategic Asset Allocation Moderate 1% -15% 12% 59% 3% 12%

We can see from the numbers that while our optimized selection has suffered in the short term, it has done well in the longer term. I think this is analogous to having small cap stocks rather than large cap stocks. The blue chips are the large cap stocks and they will do better in times of financial stress. The smaller companies will do better when risk appetite increases. We observe that you have higher returns but with increased volatility.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

The more detailed analysis and graphs give you a visual view of the volatility.

I personally like this approach. We have selected a portfolio of blue chip stocks to give us some stability and swapped out for some smaller alternatives (relatively speaking) to provide added returns albeit with added volatility. What we said last time is that this is a basis for a more complete portfolio with other choices to smooth out some of the volatility. Adding other asset classes -- for example real estate, emerging markets and commodities might be useful.

This is certainly an interesting start from which to build.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.