Best Bets for Blue Chip Income

09/25/2015 9:00 am EST

Focus: STOCKS

Kelley Wright

Managing Editor, Investment Quality Trends

Gravity, someone once said, is a stubborn thing; you just can’t get away from it, asserts Kelley Wright, value investor and editor of Investment Quality Trends.

Just as there are laws of nature, there are laws of economics. Both can be manipulated for a time and to an extent, but neither can be repealed forever.

A major characteristic of capitalism is the force known as creative destruction. Goods and services are created and deployed only to be supplanted by something else that is better, cheaper, etc.

Behind all goods and services are human beings with nervous systems and emotions who sometimes adapt to progress and stay in business and others that fail.

That, my friend, is how the business cycle works: it is what it is. Markets follow a cycle of creative destruction as well.

They expand, often to excess, and then must contract, again often to excess, where the floor is swept clean so the cycle can start over again.

It is when that process is subverted that things can get ugly. You see, in the end, gravity matters, which is why trees don’t grow to the sky.

The good news from my perspective is that we can now get a sense of how the remainder of this half-cycle will play out.

Without getting into the tall weeds of technical analysis, the high in the broad market in May was the end of the uptrend that began at the lows in 2011.

Since the high in May the market has been undergoing a corrective sequence that typically plays out in a three-part series of down-up-down moves.

In my opinion, the low on August 24 represented the initial down move and since then has been in the intermediate up move.

If this scenario plays out in text-book fashion we will see one more move down before the market begins the final uptrend of this half-cycle.

Meanwhile, some particularly indiscriminate selling has given the quality and value investor an opportunity to acquire shares of some outstanding companies at historically good values.

By example, Procter & Gamble (PG) is the heaviest weighted stock in the Consumer Staples sector and now offers excellent good value.

In the Consumer Discretionary sector the highest weighted blue chip is Walt Disney (DIS), which briefly dipped into Undervalue and may do so again. What you are looking for is a price of $91.30 or lower.

In the Energy sector the world is your oyster. In the Healthcare sector the number one stock is Johnson & Johnson (JNJ), which is right at the top of its Undervalued area and the number two stock, Pfizer (PFE) is not too far off as well.

In the Industrial sector, 3M Company (MMM), Boeing Company (BA), and Union Pacific (UNP) offer good value, as does United Technologies (UTX).

Who knows, you might even get a shot at the highest weighted company in the sector, General Electric (GE), if it drops to the $20 area as it did for about 30 seconds on August 24. Hey, anything is possible.

Overall, declines may be unpleasant emotionally, but they are healthy and necessary and provide opportunity to the enlightened investor that has been disciplined.

Your reward is you get to acquire great companies that not only offer good value but also have the most upside potential with the least downside risk.

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