Apparently, it only takes a week of stock market volatility to raise doubts about the viability of blue-chip stocks. In the 1920s, companies and their stocks were deemed "blue chips" -- a reference to the highest-valued chip on a poker table -- if they were titans of industry and represented quality and reliability in good times and bad. The name has stuck.
But over the past couple of weeks, many blue chips have taken a pounding in the market, so the typical skepticism has kicked in: bigger is not a guarantee of better; blue chips are getting stale and not keeping up with the technological trends of the day.
Coca-Cola (KO) shares have fallen by nearly 10% in the past couple of weeks. IBM (IBM) took a beating this week, falling nearly 20% in a matter of days after reporting flat sales. McDonald's (MCD) was crushed after uninspiring results, not only in the U.S. but overseas, where most investors count on seeing growth.
Not all blue chips are the same, of course. And being a blue chip is no guarantee of eternal success. Back in 1959, the Dow Jones Industrial Average included Anaconda Copper, Eastman Kodak, Woolworth, American Can and Sears Roebuck -- all of which either have gone out of business or are now just a shadow of what they once were. Today Cisco (CSCO), Caterpillar (CAT), DuPont (DD) and Visa (V) are among Dow components. Twenty years from now, some of these blue chips will likely be singing the blues.
But when blue chips sell off indiscriminately, it can often be a great opportunity to pick up a quality, long-term holding capable of generating satisfactory results. One of the more intriguing names is IBM. Shares are down nearly 25% over the past 52 weeks and it's possible that they can fall a bit more. IBM continues to have a very sticky customer base, and it has a proven ability to reinvent itself many times over. In addition, the business generates a ton of cash flow that it uses to pay dividends and retire its stock.
Another blue chip that hasn't been axed but looks interesting is agricultural equipment giant Deere (DE). With a yield of nearly 3%, trading at 13x forward earnings and a return on equity of 34%, the business is worthy of being watched very closely.
General Motors (GM) is a name I've beaten to death at Real Money as a quality, long-term pick, and I will continue to do so. This morning the company announced earnings on the better side of analyst expectations. The entire business has a market cap of $50 billion and free cash flow could exceed $7 billion over the next couple of years. Apply a very conservative 12 multiple to that and you get a valuation of $94 billion and earn a 4% yield while you wait.
Some blue chips may indeed be old and weathered, but Mr. Market tends to overcompensate and bash whole classes of companies, which should create pockets of opportunity in this market.