3 blue chip stocks to watch
After nearly a decade, these growth stocks are finally showing some signs of life.
(Money Magazine) -- Blue-chip growth stocks are a great foundation for your portfolio because steady, superior earnings growth usually produces above-average returns.
But you'll find the number of large, seasoned growth companies with great financial strength is surprisingly small - fewer than 150. Winnow that down to a core of leaders in a range of industries and you have the Sivy 70 list of blue-chip growth stocks for the long run.
Unfortunately, as a group these stocks haven't kept up with the rest of the market in years. Many were overvalued at the height of the growth-stock boom of the late '90s.
Then they got crushed in the 2000-02 bear market. And as recession fears intensified late last year, they deteriorated again. The result: The stocks have sunk below historical levels and remain undervalued by at least 20%.
Then about four months ago, things started to change. Blue-chip growth stocks came to life again and started performing noticeably better than the Standard & Poor's 500 index as a whole.
In fact, growth stocks in the S&P 500 gained 2.5% between March 10 and July 25, while value stocks (defensive shares that conservative investors favor because of their high dividends) fell 3.7%, according to Morningstar.
Why would this key group be showing signs of life when the overall market is still suffering - in fact, the major stock indexes are technically in a bear market?
Several reasons. The most important is that their share prices reflect expectations of profit growth far into the future. So no matter how bad current problems appear, if investors grow more optimistic about earnings prospects three to five years out, growth stocks stand to benefit.
Better performance could reflect hopes that an economic upturn will occur soon - perhaps within the next six to nine months. Indeed, some experts think the worst of the economic downturn has passed.
Speaking in Boston in June, Federal Reserve chairman Ben Bernanke said that even though the economy looks weak, the odds of a "substantial downturn" have diminished.
At today's depressed prices, many blue-chip growth stocks look quite attractive. And even if the economy isn't set to recover just yet, such stocks enjoy advantages in tough times.
Companies with strong balance sheets like these can borrow even when credit is tight. And their market strength helps them stay ahead of inflation more easily than competitors that have trouble raising prices. This may explain why Standard & Poor's projects that earnings for large-cap growth stocks will climb 13% this year, while profits for value stocks are forecast to rise just 2%.
Still, the key is to make sure you aren't overpaying. So I went through the Sivy 70 looking for shares with double-digit projected annual earnings growth and below-average price/earnings ratios (less than the S&P 500's 17.8 times 2009 estimated earnings).
I also looked for stocks that have beaten the S&P since March, as that's a sign the businesses have some kind of edge in today's tough economy. Based on those criteria, a few stocks look promising.
It's one of the two largest U.S. railroads (along with Union Pacific (UNP, Fortune 500)). And leading railroads have benefited from high oil prices because they are more energy-efficient than trucks or planes.
Transportation stocks perform best in a robust economy, but Burlington's (BNI, Fortune 500) shares have soared more than 12% since March 10. Burlington still looks like the more attractive of the big rails, based on price.
Record-high oil prices have certainly been a boon to integrated oil companies like ConocoPhillips (COP, Fortune 500), which has the majority of its reserves in stable, developed countries. But even if prices fall a bit over the next five years, top oil companies will still prosper.
Conoco's earnings growth, projected by analysts to average 14% annually, is likely to outpace that of competitors like ExxonMobil (XOM, Fortune 500). That's in part because Conoco bolstered its reserves through a stake in the Russian firm Lukoil and its Burlington Resources acquisition. Its dividend yield also adds 2.3 percentage points to its likely return.
The giant discounter's business has held up well despite the current economic squeeze. Reason: Many consumers are willing to trade down to save a buck. Earnings per share were up almost 12% in the most recent quarter on a 10% increase in sales. And retail sales are expected to pick up further this summer as consumers start to spend their government stimulus checks.
Ultimately, the biggest sale at Wal-Mart (WMT, Fortune 500) could be on its shares, which are at an 18% discount relative to their five-year average P/E. Now that's a better-than-everyday low price. 
