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TMFAleph1 (94.89)

Why Does The Market Hate Blue-Chips?

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7

August 16, 2010 – Comments (6) | RELATED TICKERS: PFE , COP , V

My thoughts on this question. I welcome all respectful/ informed feedback.

Alex D

6 Comments – Post Your Own

#1) On August 16, 2010 at 3:41 PM, jlmjlm77 (99.44) wrote:

Same reason (fear and stupidity) the market did not like MCD, XOM and NEM in 2003.  Growth story over MCD 2-28-03 close at $13.61, today $71+.  Too big, not handling Mobil acquisition well, XOM 2-28-03 $34.02, today near $60.  Gold does not have any real demand anymore, NEM 2-28-03 $27.33, today $57+.  And this increase excludes dividends paid over the last 7  + years.

Today a wise person would take PFE, COP and V over an investment in a 10 year treasury. 

 

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#2) On August 16, 2010 at 5:25 PM, rd80 (98.47) wrote:

I think the "Boomers aging" effect will turn back towards quality dividend payers.  Retirees/near retirees looking for income could buy a 10-year Treasury yielding 2.7 or so or a 10-year high quality corporate yielding just a hair more - or they can earn the same or more with a quality dividend paying stock.

Some comparisons:
JNJ - stock yield 3.7%
JNJ's new 10-year yield at current market 2.9%
Ridiculous disconnect here, JNJ could improve cash flow by floating debt and buying back stock.

MCD - stock yield and new 10-year both yield 3.1%

XOM -Stock yield 2.9%, bonds maturing in 2018 about the same.

The difference?  The stock payouts will go up; the bond yields won't.

Income investors will start to look at the discrepancy and come to the conclusion that blue chip stocks are a much better income value than either Treasuries or high quality corporates.

Good article and thanks for the chance to link to mine :)

Disclosure - Long JNJ and MCD.

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#3) On August 16, 2010 at 6:08 PM, TMFAleph1 (94.89) wrote:

Russ--

Thanks for the comment. I dismissed it summarily in the article, but I do think share sales by boomers could potentially slow.

Alex D

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#4) On August 17, 2010 at 2:15 PM, Valyooo (99.42) wrote:

rd80, I dont understand that logic...obviously the company plans on moving faster than the rates they pay out to bondholders, otherwise the company would be losing money.

What if the stock loses capital appreciation, or the dividend needs to be cut? Then the bond yield is more safe.

While I do not disagree that blue chips > bonds, your statement makes it seem that stocks pay a dividend and are guaranteed to go up, and that bonds just stay flat...but forgetting that stocks also drop.

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#5) On August 17, 2010 at 2:23 PM, Valyooo (99.42) wrote:

Sorry, I just saw that you responded in the other thread where I posted that.

Still, capital gains aren't a definite thing.

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#6) On August 17, 2010 at 2:40 PM, TMFUltraLong (99.95) wrote:

It's investor psyche plain and simple. You have had two bubbles in the last decade which have shown traders the temptations that can be had from 100% gains month over month. 

You've begun to crack the surface in that we have a decisive shift between boomers retiring and selling off their holdings and a new wave of speculators from the bubble era jumping in and out of what they deem are the most volatile companies they can find (which in most cases are not going to be blue-chip high yielding stocks). There's an inherent distrust in long-term holding right now as the last decade has shwon us that value will be wiped out whether you're a trader or an investor. 

You also need to factor in the channels that lead to investment have really opened up over the last decade. There wasn't anything in the way of tools to research non-blue chip companies prior to 1998-2000. The internet and online brokerage accounts opened up a vast amount of information to this new group of speculators and has vastly changed the game. People want to lead and want to be ahead of the wave of money. If they're buying the same thing everyone else is buying the chance that they will be ahead of everyone else drastically diminishes.

There's a few tangents for you to consider...

UltraLong

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