Blue Chips? Only In Name

4/6/2015


Every month, ICLUBCentral, a provider of accounting solutions for investment clubs and individual investors, lists the 40 stocks most widely held by investment clubs. More than 100,000 investors use the company's software, so the list represents a reasonable proxy for the most popular holdings of individual investors. The top 10 holdings in ICLUBCentral's latest report are listed in the table below.

MOST WIDELY HELD STOCKS IN INVESTMENT CLUBS
----------------- Quadrix Scores -----------------
Company (Price; Ticker)
Popularity
Div.
($)
Yield
(%)
Momen-
tum
Value
Quality
Earns.
Ests.
Overall
Apple ($124; AAPL)
1
1.88
1.5
94
70
98
98
99
General Electric
($25; GE)
2
0.92
3.7
48
73
51
66
63
Johnson & John.
($99; JNJ)
3
2.80
2.8
38
53
68
33
48
Ford Motor ($16; F)
4
0.60
3.8
32
88
54
19
62
Microsoft
($41; MSFT)
5
1.24
3.0
26
70
82
13
54
PepsiCo ($95; PEP)
6
2.62
2.8
36
45
70
18
40
Disney ($105; DIS)
7
1.15
1.1
74
37
91
68
79
Exxon Mobil
($84; XOM)
8
2.76
3.3
18
72
73
68
61
Procter & Gamble
($82; PG)
9
2.57
3.1
20
45
56
17
28
Qualcomm
($69; QCOM)
10
1.68
2.4
63
83
95
88
96
Note: Quadrix scores are percentile ranks, with 100 the best.           Source: ICLUBCentral.

Many of these stocks are big, well-known "blue chips." Yet only one of the 10 stocks — Apple ($124; AAPL) — is recommended by the Forecasts. And among ICLUB's list of the top 40 holdings, only six — Apple, CVS Health ($102; CVS), Google ($549; GOOGL), Gilead Sciences ($98; GILD), Schlumberger ($84; SLB), and Wells Fargo ($54; WFC) — are rated Buy or Long-Term Buy.

Our lack of interest in some of the the most popular stocks inspires questions from subscribers:

Q Why does the Forecasts hate popular, blue-chip stocks?

A We don't hate blue-chip stocks. We do have reasons for excluding many stocks investors perceive as blue chips, most importantly poor scores in our Quadrix stock-rating system. With few exceptions, the 10 popular stocks in the table at right earn middling Overall scores. The Forecasts uses a disciplined, consistent methodology for selecting stocks, with the Overall score a key component. We focus on stocks scoring at least 80 Overall, and preferably above 90. A stock earning a 50 is unlikely to be selected as a Buy or Long-Term Buy, no matter how many individuals consider it a blue chip.

Another reason for exclusion is lack of catalysts. Catalysts can be new products, management changes, financial engineering (big dividend boosts or stock buybacks), or simply the potential to outperform Wall Street's profit expectations. Because so many analysts and investors follow blue chips, they may have limited ability to surprise.

Q Do you avoid blue chips because they are already popular?

A Many widely owned stocks face headwinds. In simplest terms, if a lot of people already love a stock, fewer are left to buy it and push the price higher. However, there are exceptions, Apple chief among them. We see plenty of upside locked up in its solid operating momentum, cash-heavy financial position, and potential catalysts in the form of new products and oversized dividend increases and stock buybacks.

Q Several of these consensus blue chips have underperformed in recent years. Should I sell them?

A If you seek to maximize expected returns over the next 12 months, the Forecasts recommends you stick to our Buy-rated stocks. If we don't rate your blue chip a Buy, don't hesitate to sell it and buy our recommendations.

The Forecasts selects Buy-rated stocks based on their return potential over the next 12 months. That doesn't mean we automatically sell after holding for 12 months — we have had some stocks on our Buy List for years. For Long-Term Buys, we consider total-return potential over the next 24 to 48 months.

Q If I've held my blue chip for 20 years and have big embedded capital gains, should I sell anyway?

A Because we can't know the tax

situations of all our subscribers, the Forecasts recommends stocks solely on their investment merit. Obviously, taxes matter, but far too often taxes drive investment decisions to the detriment of investors.

Of course, not all blue chip companies with Overall scores below 80 are bad stocks. Hundreds of the more than 5,000 U.S.-traded stocks represent worthwhile investments. But the Forecasts doesn't simply seek worthwhile stocks.

Instead we seek those 25 to 40 stocks that provide the best opportunities. Investors have a finite amount of money to invest. Tie funds up in blue chips that used to perform well but no longer look good, and you may weaken your portfolio.


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