John and thread, I did not see this article posted here this AM.
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Blue-Chips, PEs, Volatility and Stock Picking
By Thomas Kurlak
Special to TheStreet.com
4/25/01 8:21 AM ET
Why does a decline in the price of a stock increase its supply, while a decline in the price of clothes, cars or houses causes the opposite? When we see an item on sale, we often make a purchase that could have been deferred. When a stock suddenly declines, we see investors seeking reasons to sell.
Why the difference? Stocks are stores of value. Cars and clothes are necessities to be consumed. If stocks do not hold their value and decline, fear of loss of future consumption can overcome reason and patience.
Blue-chip stocks are supposed to hold their value better than other stocks in bear markets. During the past decade, some tech stocks that were previously considered speculative have joined the blue-chip list. But the recent bear market has caused investors to reconsider some of these newcomers in light of earnings collapses.
Increasingly, Intel (INTC:Nasdaq - news - boards), a relatively recent addition to the Dow Jones Industrial Average, is being discussed as a "former" growth blue-chip that is now too tied to personal computers to regain past growth rates. Its outlook is being questioned. Many analysts are lowering opinions and suggesting sale of the stock. And yet its price-to-earnings ratio of 40 times 2001 estimated earnings is well above the average of the S&P 500. And few individual investors I talk to feel inclined to sell Intel at current levels. Why are analysts fearful of further losses while the stock remains stable at about where it was at year-end?
Going to the Store
Could it be that Intel is still perceived as a store of value? And if so, why? Cisco (CSCO:Nasdaq - news - boards), another emergent blue-chip now questioned by investors, has fallen harder than Intel in spite of a better track record. What is the difference between Intel and Cisco?
More than a dozen years ago, I discussed P/E ratios and volatility with Intel's treasurer, Arvind Sodhani. He had studied successful blue-chip companies and concluded that those with the highest price-to-earnings ratios and lowest volatility (good stores of value) shared some common attributes. First and foremost was global brand recognition. Second was a high percentage of individual investor ownership. And third was a concentrated product line.
Intel management must have paid heed to Sodhani's findings because it proceeded to create the Intel Inside ad campaign that became the foundation of its global brand name. It also opened its investor communications to the investment world and launched into years of visits to local analysts' societies and TV appearances before mass audiences where individual investors could see management up close. As a result, by the time I left Merrill Lynch, Intel was the most widely held stock in the firm's retail network. And we all know Intel maintained a focused product line that allowed it to dominate the world microproccessor market for the past 15 years.
These factors: brand recognition, individual ownership and focused product line, show up over and over among successful blue-chips such as Coca-Cola (KO:NYSE - news - boards), Johnson & Johnson (JNJ:NYSE - news - boards), Disney (DIS:NYSE - news - boards), McDonald's (MCD:NYSE - news - boards), ExxonMobil (XOM:NYSE - news - boards) and Procter & Gamble (PG:NYSE - news - boards).
Faith and Trust
Faith in the future of any company has to be based on trust in management. And that trust can partly derive from investor familiarity with it and the comfort of knowing a company's brand through personal experience. This trust is something a mutual fund can't feel.
And this returns me to my opening subject: Why does a decline in the price of a stock increase its supply? Stock charts invariably show volume rising with every price break downward. For most stocks, this can only mean institutions are selling large blocks to avoid further negative "performance."
Investors would do well to concentrate their holdings in names that have the three attributes discussed here. Stores of value are rare. They protect purchasing power over the long term. Blue-chips store value and build wealth.
Large individual ownership can soften the impact of bear markets. Global brand recognition brings global investors, further dampening the herd instinct among institutions to sell. A focused product line enables economies of scale that lead to market dominance and low unit cost.
Consider these factors when reviewing portfolios. They can also help you find future blue-chips.
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Tom Kurlak is the former semiconductor industry analyst for Merrill Lynch, now retired. For 19 consecutive years, Kurlak was on the Institutional Investor All-Star Team until his departure for Tiger Management in February 1999. At time of publication, Kurlak was long Intel and Johnson & Johnson, although holdings can change at any time. |
