Is There Such A Thing As A Blue Chip Stock Anymore?
On friday, we saw Citigroup do a recap and dilute the common stockholders significantly and we saw 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 GM? That's another potential bankruptcy looming. The NY Times quoted an automotive consultant today about GM:
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:
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:
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.
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Comments (Archived):
And I think most of Main Street, myself included, (since the 80’s especially? I’m guessing) tend to equate how the Dow is doing, to how the economy is doing. A negative day in the “Stock Market” sends waves of worry across Main St. It’s a psychological coupling that gets reinforced in good times and bad by all media. One thing that the 21st century and post-bubble brings is that a different kind of media is sending different kinds of messages out in waves…more nuanced, more intended to start a discussion than make a pronouncement. You pick up a newspaper, check the Dow in 1999 to see how we’re doing…hey, market’s up, great! Is there some different blended index, some other measuring stick, some other metric that provides the snapshot that the Dow used to? Conversely, a nostalgia for that simplicity, and simplistic view, is probably brewing, especially if/as things worsen.
This is the type of thinking that is really making the economic downturn worse, in my opinion. To use the performance of 30 companies out of the millions that operate in this country as a broader indicator of our economic health is extremely dangerous. The problem is that most people simply do not have the time nor the energy to really investigate what is going on with the economy, they only see CNN and Fox News commentators playing chicken little, and assume that their entire financial life is going to come to a screeching halt because Citigroup is in the crapper. On a day-to-day basis, Joe Schmoe main street is more affected by the performance of his local restaurants, grocery stores, and gas stations.
Yes. That was exactly my point.
Though I agree on the whole that looking at this from a broad perspective people get worried, nothing attracts a crowd like a crowd, I think that the blue chips losing money and crashing affects Joe Schmoe more so than local businesses. Reason being that most of Main St. has their lives tied up in broad based mutuals. So when the entire market goes down, such as S&P or DJ, they see a significant amount of what they had thought was retirement money evaporate. It’s a downward spiral, consumers will lock up discretionary income when faced with the prospect of their 401k’s bleeding, which only deteriorates the market further. It’s pretty obviously a confidence issue, and it ain’t changing quickly.
The companies who are really getting whacked are the ones who created all sorts of financial engineering to increase earnings. Both GE and General Motors were finance companies who also made stuff. The lesson here is that all the really bright folks who went to work on Wall Street sold folks on financial alchemy. A traditional company like GE at one point made 50% of its profits from finance and not making things. Merlin has finally been exposed.
I wonder if the poor performance of former blue chips will finally kill the buy and hold mentality of many retail investors. Sort of like the Nasdaq crash earlier this decade proved that you need some diversification in your portfolio.
Buy and hold needs to be complimented with other tools. Retail investors need to learn how to hedge longs, initiate long/short vanilla equity pair trades, and understand options. They won’t learn because finance has been made more intimidating than physics. Long-only is playing with an incomplete deck.
Don’t know, but “stop loss” orders are going to become pretty damn popular henceforth! LOL
intrigued by your notion that “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.”what would you cite as some examples?
i am trying to get through my email this morning steve so i can’t write something thoughtful right now, but this post from november of last year explains my thinking pretty wellhttp://www.avc.com/a_vc/200…
Steve – not taking away from freds original thinking but Umair has been writing about this for years, and i know fred reads his stuff. he can be found at http://blogs.harvardbusines… and at havas media lab.pretty prophetic stuff.Update: http://blogs.harvardbusines…that should give anyone not familiar with him a good primer
Blue chips are still blue chips, even in the face of a global valuation reset. The idea that so many companies were worth 5X revenue or 60X earnings was preposterous, blue chip/growth/whatever. Clearly, the “greater fool” game is done. We will go back to buying companies at a discount to their intrinsic value to drive true investment outperformance. In a year, GE will still have a good valuation premium to lesser run companies; they’ll just both be at a 50%-70% discount to where there were at in 2006.But I also agree with what you mentioned in your 3rd to last sentence. New companies, built around modern secular opportunities, with new(ish) DNA (to use Umair’s term) will fare better. Technology companies should maintain relative outperformance because we have not come anywhere close to driving all possible efficiencies through technology implementation (not too mention the next iteration of innovation).
It’s not so much the blue chip but the years of neglect by common and preferred shareholders and board members. Umair always talks about the Macropolypse and was years ahead here.America was soft and you can’t tell me that eastman Kodak (disgusting avoidance of easy, than hard decisions), GE (disgusting balance sheet management) and Citibank (disgustingly greedy management and ignorant boards) are what iilled the blue chips.All these comapnies made hundreds of greedy, bad decisions to end where they are now.we watched as common shareholders and CNBC cheered them on making the people the stars and not the products and companies.really….we should all be ashamed.
Right on Howard -The lack of supervision by the boards and shareholders have put us in a terrible position. The only question I would throw out there is:Did our (the public) desire for unrealistic stock market returns encourage the risk taking by these companies? Look at the latte factor? Some of those tables use 10% annual returns!
Of course, but the other thing is the constant flow of money into the markets on a quarterly basis from 401Ks. We will know that things have changed when the asset allocation of 401Ks changes in response to this crisis.I would be willing to bet that less than 25% of America has reviewed their 401K asset allocations in the last 12 months. It just keeps pumping into the stock market and mutual funds.
What we need to see are those mutual fund managers becoming more activist in nature. They should hammer the companies on compensation without results and financial shenanigans.
thats exactly who i thought of when i began reading the post. out of this comes unfathomable opportunity – especically where tech can re-constitute some of the components of said Macrolapse (is that a word?)
three observations:– look at how 2006’s ‘value investments’ have done. what were the companies with low P/E ratios that paid lots of dividends? banks and financials. say you were looking for blue chip, safe investments in 2006; based on the historical definition you would have been very, very wrong.– i recently interviewed at a financial company i had previously worked at a few years ago when they were a startup. right now they have 500 employees, lots of cash in the bank, and they are expanding judiciously. in short, they are acting like a blue chip company. meanwhile the big banks are in all kinds of trouble and are not able to extend professional security to anyone. the tables have turned.– given that, this is the wrong time for the country to become risk adverse. if we could let the old institutions fail and start working on the new, we would be much better off ten years down the road. but given the level of financial risk aversion at this point it’s going to be difficult. i think we could get stuck in a professional “liqiuidity trap” for some time.
Hmm…interesting 3 companies chosen to look at “blue chip”:Company A) Company bailed out 3 times and is nearly nationalized with 2008 FY losses of ~$18BCompany B) Company that received one bailout and is begging hat in hand with 2008 FY losses of ~$31BCompany C) Company that uses Govt’s new programs related to TLGP and the Fed backing of CP with 2008 NI of ~$18B and expecting another ~$15B of NI in 2009.
Damn…I was hoping I was wrong about all of that. And it seems you’ve just reinforced my fears. Why am I afraid? Because I don’t believe that our markets to be all that prepared for an economy dominated by IT/Web X.X. For a large part of the market…its still not the centre of the universe.There goes our working class…and a big chunk of the market.A previous quote of mine from JLM the Hood comments that I feel apt to repeat:* I keep coming back to the sobering thought that this crisis is more profound than a housing subsidy and as Rick S points out…collectivism is not the answer. Not to sound sensationalist, but I think we’ve reached peak life quality in the conventional sense.We’re at the precipice of a profound transformation…I don’t have the answer but I suspect it has something to do with our sense of the American Dream….Dinner cost me around 30 bucks – plus 5 years of angonizing temptation to open a great bottle of wine…priceless.
Over the past decade listed companies have been encouraged to substitute equity for debt so as to lower their cost of capital and increase their ROE. This process was further accelerated by artificially low interest rates and complicit rating agencies. Blue chips benefited particularly from favourable ratings, owing to the amount of their debt issuance.Relative share price performance and therefore bonuses are strongly correlated to ROE.But once again, short-term gains have come at the expense of long-term damage.As the saying goes, if you ain’t got debts you can’t go bust.
paradigm shift, brought about out of necessity, result will be several hundred million people understanding life in a different way .. most likely having more impact than even the current events suggest … enjoy it
I think an underlying problem is that the big, mature companies got “growth envy” so they turned themselves back into “growth” companies by goosing themselves with leverage (GE and GM opening financing arms, for example).Companies whose core businesses were inherently growing didn’t see the need and so didn’t get into trouble.The new blue chips are companies like Google, Cisco, and Microsoft, who have dominant market positions and cash-heavy balance sheets.Right now I’m seeing huge opportunities for healthy and innovative companies to take market share through consumer-friendly and value-priced products. I’m seeing that every day in my company’s largest client, which is knocking the cover off the ball against its entrenched competition.
Point well made and taken.Of course in the instance of GE they had a commercial paper program to fund their manufacturing operations for a long time before they ever wandered off into real estate. They had in effect been financing their internal manufacturing requirements while GM had been financing their external customer credit requirements.I guess the challenge is that if you are going to be both a manufacturer and a lender, then you better be damn good at both and have a “blended” balance sheet which reflects the realities of these two very different types of risks.And you better have a management which has an intimate understanding of both of those lines of business and is able to resist the temptation to favor one over the other.GE Capital, as an unregulated financial institution, was able to weather the S & L crisis the last time around because it could do things that banks could not to restructure its problems (thereby delaying the accounting day of reckoning) while not “marking to market” their loan portfolio. In many ways it was simply “financial engineering” but it worked.
wrong – MSFT – wrong. they might be high tech, but they mos certainly use the old economy rules to manage their business.
I was living in Arizona a few years ago and having coffee with a good friend of mine an ex Vietnam Vet and Wharton Graduate , I was a year from retirement and he said it is time for you to possibly transfer your stocks to the Bond market! Among other items I had was about 2000 shares of GM I think it was selling for around $38.00 and if I remember had a book value of $250.00 per share don’t quote me I get senior moments , I sold it- and the rest of my portfolio the only stock I kept was Philip Morris ,but a year later sold it also-my bonds and CD’s saved my fanny-GM has only one real option BK and reorganize they are knee deep in inventory with vehicles that have an outdated fuel delivery system – cars that have 6000 to 7000 pound curb weight and get 15 miles per gallon in the city- They should retrofit their fuel delivery system -This is a little of the subject- Blue Chip is as dead as Custer-I think in the future if VC firms go public and generate profits they may restore investor confidence – howardlindzon doth speak the truth-
GM would seem to be a stretch to be included as a “blue chip” company. The real question here is why on earth is it still a component of the DJIA.Its low market cap should have gotten it kicked out of the club years ago. Must be that mountain of unprofitable sales, which now appears to be more like a gigantic jobs program. I sure hope we’ve learned the lessons of Gosplan and keep Washington out of trying to pick next year’s model.
Blue chip stocks — large, national/international companies w/ stable earnings, good earnings growth, dividend payment and growth, high quality management and high quality products — do not exist currently based upon the actual definition. I suspect they fail based simply upon the track record of the management.It is interesting that there is not a single company anybody can find which has really weathered the storm — and it seems like there should be some. I can make a case for Walmart and McDonald’s but their stock price undermines that argument. Are there some out there?I conclude with the commentator that this “sea change” is more than just an industry, cyclical, sector or segment issue. This is a paradigm shift — a drop to a lower curve on a family of curves.”Help, I’ve fallen down and I can’t get back up to the higher curve!”Warren Buffet, who did not exactly cover himself with glory in the last 2 years, makes a couple of great comments in his “letter” — have plenty of cash always (I guess not too astounding for a guy in the insurance biz.) and look at a home as a “comfortable” place to live rather than a trophy or paen to wealth. I am not suggesting that I agree with that but I think it is interesting from a chap who can afford anything even now.Conspicuous consumption is way out of fashion (even if you can afford it) and khakis and top siders are way in — economical metaphorically speaking. Or as I like to say — worn jeans and old, old boots.Money — whether equity or debt — has a price. When debt becomes too cheap — as I think it did — then folks fail to load in the equity because they are blinded by the light — of the cheap debt. Equity props up balance sheets, which is after all the entire problem w/ the financial sector just now. We all have to remember the big difference in hunting for debt or equity — pricing and safety are two different things. Even though money is still just money. Debt, like speed, kills.It will be interesting to see the long term impact of getting the crap scared out of us because I doubt it will be a long term impact like our fathers’ comments about the Great Depression. We all have very short memories just now.One of my favorite rules is — we all have one month of experience but only six times. That’s how fast the economy and life is moving. You certainly can’t get away today with what you would have contemplated just four months ago.
JLM what is the ticker symbol of the company you run?
LTFD or LTFD.OB — turnaround deal. Penny stock but we are just quietly going about our business adding units. I raised $9MM of equity in 2007-8. Wish I could say I saw this coming. Luck triumphs over most everything. Have to be very careful about any commentary due to SEC implications.
Fred — you’re either selectively looking at 3 massive frauds (C, GE Finance, GM) or you aren’t aware that these “blue chips” clearly aren’t blue chips. C and GE (Finance) are massive levered bets. That makes them highly risky. There’s a reason Buffett avoided Financials common — they’re levered black boxes. GE Finance is no different than AIG or C. GE proper ain’t the problem. It’s that investment bank inside GE. No one is his right mind thinks GM is a blue chip. If you want a blue chip, look at companies that generate huge free cash year in and year out. MSFT is a blue chip. WMT is a blue chip. JNJ is a blue chip. MCD is a blue chip. They have sound business models and they don’t need bailouts. And it should’ve been removed from the DJIA a couple of decades ago. What you should be thinking about is not that the phrase “blue chip” means something particular today. You should be thinking about how ridiculous the DJIA as a price-weighted Index is. Market-cap weight it and you’d get something very different.YTD, SPX -18.6%, NASD -12.6%, and DOW -19.5%. If the DJIA weren’t price-weighted, it would been down 30%+ I suspect given YTD, C -80%, BAC -75%, AA -50%, CAT -50%, GE -50%, AXP -40%, GM -40%. These stocks are the lowest priced stocks in the DJIA. None of them has a meaningful market cap with the exception of GE which is still a $90 bln cap. IBM is +5% and it just so happens to be the highest priced stock in the DJIA.The phrase was coined over 80 years ago to describe high-priced stocks. It has come to mean over the years any stock that’s large quality company. I believe quality is measured by the business model, management, quality of earnings, transparency, free cash generation above all. Today, the phrase “blue chip” is meaningless. The problem is the import people place on it.
<rant>I think this points to the fundamental problem with the way public companies are incented. These blue-chip stocks are ones that have achieved what the market wants them to achieve – bigness. Big public companies are supposed to keep getting bigger. Show year over year growth. So they keep buying up companies. Creating “synergy”. Creating “efficiencies”. But I have yet to see one big company that really does synergy well. Fred, I think it may have been you or one of your readers that suggested if the gov’t bails out GM, they should force them to be broken into smaller pieces and I couldn’t agree more. We need to figure out a way for public companies to be rewarded without becoming 500,000 employee companies that are too big to innovate. So it’s just now all finally catching up. All these blue chip companies waste too much money, have too little accountability, have too many people whose jobs are to not screw up rather than to take risks and come up with good ideas. Last time I got a Ford rental car, it took me two minutes to identify at least a dozen major UI flaws in the controls. You’re telling me that out of all those people making way more than I do, not one of them thought to say, “Hey, this design sucks! We shouldn’t spend a billion dollars sending it into production!”As surprising as it is, it should be no surprise that they are falling harder.whew. </rant>
When I read this post, it made me think of this post written by one of or social media gurus here in Austin http://everydotconnects.com… about how big companies are relating to the current world in the same was as they have in the past…and they are failing. I enjoyed the picture of the empty phone booths!
The demise of 15% of large household-name companies within the following 10 year was predicted in 2001 in the book by Richard Foster and Sarah Kaplan – Creative Destruction or Why Companies That Are Built to Last Underperform the Market – And How to Successfully Transform Them. By bailing out natural losers, the government is giving them unfair advantage and is sending out a very wrong message.