5 Blue Chip Breakout Plays With Room To Rally

Includes: AXP, CSCO, HD, INTC, KO
by: David Alton Clark


Early on in my investing career the mantra was "Buy Low Sell High". Which isn't such a bad thing; nevertheless, it only covers half the opportunities. Sometimes you can buy high and sell higher. Stocks hitting their 52 week highs are often doing so for a good reason. Only looking for turnaround plays limits your ability to profit in the market. Additionally, buying low is often a dangerous game. Picking bottoms is a tough business.

In this article I have selected five blue chip large cap stocks hitting 52 week highs to highlight. A blue chip is a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. I posit these stocks have an extremely favorable risk/reward ratios coupled with significant upside potential based on macroeconomic, sector and company-specific catalysts. These stocks have great stories and positive facilitators for future growth. When I choose to "Buy High and Sell Higher" it is with strong blue chip names not speculative small cap momentum plays.

Compelling Fundamental Statistics

The stocks discussed are S&P 500 Buy-rated large cap or better stocks with extremely strong fundamentals, performance statistics, earnings and dividends. Additionally, these stocks have great stories and positive catalysts for future growth. Moreover, most of these stocks have recent upgrades and positive analyst comments.

American Express (AXP)

After passing its stress test, American Express decided to authorize a $4B stock repurchase program and raise its dividend payout by 11.1% to $0.20/share. The stock is trading at $58.37 up $1.12 for a 1.96% and currently 1.36% above its 52 week high. American Express is fundamentally strong with a PEG ratio of 1.34, a forward P/E of 12.10, a projected EPS growth rate over the next five years of 10.46% and a ROE of 27.64%. All the banks were decimated over the last year and are now poised to recover with the stress test in the rear view mirror. A well-diversified portfolio should have some exposure to this group and American Express is a great way to do it.

Intel (INTC)

Intel is considered "Old Tech" or a "Web 1.0" generation company. Some feel these old guard tech companies have lost their luster. I'm not buying it. This reminds me of the first dot com bubble. I remember people stating that the old guard "brick and mortar" companies on the DOW were subject to extinction by the high flying dot com names on the NASDAQ. Boy were those people proven wrong. In all fairness, I was right there with them at the time.

Intel is a strong company which scored its highest global market share in electronic chips in 2011 in more than a decade, according to research firm iSuppli. Intel increased its semiconductor market share to 15.5%, up from 13.1% a year earlier, aided by the acquisition of Infineon's wireless business unit. Intel's 2011 revenue rose 20.6% to $48.7 billion.

Dale Ford, head of electronics and semiconductor research for HIS stated:

Intel's rise was spurred by soaring demand for its PC-oriented microprocessors, and for its NAND flash memory used in consumer and wireless products.

Intel remains fundamentally strong with a PEG ratio of 1.10, a forward P/E of 10.68, a projected EPS growth rate over the next five years of 10.60%% and a ROE of 27.15%. Intel has recently broken out of its long-term trading range and is trading about 1% above its 52 week high. I feel this is just the start of the rally in this stock. If Intel plays their cards right, the stocks may have 20% to 30% upside from here based on multiple expansion alone.

The Coca-Cola Company (KO)

While working for Ernst & Young LLC out of the Atlanta office, The Coca-Cola Company was one of my clients. I remember thinking how lucky the employees were with free fountain drinks in the lunch room. Any favor you wanted. Coca-Cola Enterprises, the bottling company, was one of my clients as well. I remember thinking, why don't they merge and create significant savings for the companies based on the obvious synergies and cost savings by folding together manufacturing, information technology, infrastructure and real estate? Well, the deal finally got done in late 2010 and I believe the benefits are still to come. It takes time to merge back office functions and realize cost savings. The Coca-Cola Company has a fantastically talented management team and an iconic brand. Couple this with its excellent fundamentals including a profit margin of 18.55%, an ROE 27.37% and a dividend yield of 2.85% and you have a recipe for significant upside.

Cisco Systems, Inc. (CSCO)

I remember minting profits on my Cisco position in the glory days of the late 90s. It was a lock to beat earnings and continue to rise each quarter. Since that time things have changed. Nevertheless, I have faith in John Chambers to turn things around. I believe Cisco has gone through the inevitable growing pains of success and is at an inflection point. Though it lost a small portion of market share in 2011, Cisco still dominates the enterprise router market with Infonetics estimates Cisco's share to be near 75%.

Cisco had a great fiscal 2012 second quarter and increased its quarterly cash dividend to $0.08 per common share. Yet the stock has gone nowhere since the earnings report date in mid-February. Currently, the shares are trading for $20 and change.

Cisco is fundamentally strong with a PEG ratio of 1.64, a forward P/E of 10.32, a projected EPS growth rate over the next five years of 9.76% and a ROE of 14.75%. I believe the proliferation of IP addresses for all the new internet devices coming online worldwide will spur a secular growth cycle for Cisco's products. I believe this is a buy on weakness opportunity.

Home Depot (HD)

As a kid I worked in the lumber yard of the local "Handy Dan" store before it was bought out by Home Depot years ago. The spring and summer season is the time things start to pick up. This is the ideal time to buy these stocks. I see a virtual win-win scenario for Home Depot. Home owners will see this year as the first opportunity to sell their homes and be in the stores buying products to prepare their homes for sale. At the same time, new home buyers will be in the stores buying products to personalize and maintain their new homes. Additionally, Home Depot will experience the normal rush of home owners preparing for summer remodeling and yard landscaping projects. It's going to be a good summer for Home Depot I have no doubt.

Home Depot is fundamentally strong with a PEG ratio of 1.42, a forward P/E of 15.34, a projected EPS growth rate over the next five years of 14.07% and a ROE of 21.11%. With a beta of less than one and a dividend yield of 2.34%, Home depot looks like a nice way to profit near term.


Based on the above facts, the future of these companies seems brighter than ever. These blue chip stocks have strong fundamentals coupled with good prospects for future growth and pay dividends. With the market's recent run, I believe these stable blue chip stocks may provide the best risk/reward ratios and offer an opportunity to optimize the balance between capital preservation and appreciation.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO, KO, HD, INTC, AXP over the next 72 hours.