The Blue Chip Stock, R.i.p

Have you ever heard of a “Bo Derek Stock?” Me neither. But it’s a term listed in the seventh edition of Barron’s Dictionary of Finance and Investment Terms. When I was in college, we had to buy this book, and I’m embarrassed to say that the early edition that I bought back then did not seem half as thick as the current version. And I think the reason for the bloat of the new edition is that many dated terms have yet to be deleted.

So, what’s a stock that meets the Bo Derek category? The dictionary says it’s a…

“Perfect stock with an exemplary record of earnings growth, product quality, and stock price appreciation. These stocks are named after the movie “10” in which Bo Derek was depicted as the perfect woman.”

I’m sorry, but I’ve been in this industry the better part of two decades and no one – no broker, institutional sales guy, or banker, has ever used this term. If I happen to run across one of these magical perfect investments in the next two years, I’ll be sure not to compare it to a 52-year old, albeit still attractive, actress…

The term is simply no longer relevant. Just like the term Blue Chip.

A Blue Chip, so says the dictionary, is “common stock of a nationally known company that has a long record of profit growth and or dividend payment and a reputation for quality management, products, and services…”

Have you seen any of these lately?

Constellation Energy? That fails on the management test, although there might be some redemption there. General Motors and Ford? They fail on the management test, too and, until recently, failed on reputation for quality products. AIG? Fannie and Freddie? Lehman? Just fail, period.

Beyond the definition of Blue Chip is a connotation that has developed over many decades, fostered by companies the likes of General Electric. The connotation is that Blue Chips = Safety.

The notion that there are safe places to invest in the domestic equities market is dead forever. It died when Bear Stearns collapsed over a weekend, and Lehman Brothers filed Chapter 11.     

The Blue Chip idea died along with those two companies. Take IBM, for example. It’s not the technology king it once was, granted, but Big Blue has been a classic Blue Chip ever since I got into this business. While its stock has taken a hit, the company has largely been above the fray – untarnished in the media by the digressions of the big financials and flawed business models of the domestic auto makers. But can anyone say IBM is a “safe” place to put your money? Not anymore. The collapse of 2008 will scare an entire generation away from investing.

From a capital markets sense, this could be the best thing that ever happened. No matter how polished a CEO is, no matter how much economic impact a company wields, and no matter how interwoven it is in American society, no company – public or private – is a no-brainer investment. This is the lesson… (cough - along with not over-leveraging yourself to buy assets you can’t afford)… that America needs to take from 2008.

So forget Blue-Chip stocks completely. Just forget the entire concept.

But do not forget about investing in the U.S. equity markets. And here’s why…

It’s true that U.S stocks got blasted in 2008. But of the 200 top stocks that actually appreciated in 2008, 196 of them have market values of $2 billion dollars or less. That means, of the top 200 best-performing stocks of 2008, 98% of them were small-caps. In a list like that, you do have to separate the bulletin board issues with no volume from the legitimate trades, but the fact remains that several small-caps performed tremendously in a horrid market. Below is a sample of the list:


Small, Micro, and Nano-Cap Stocks Fill the Top-200 List for 2008

So even in the worst market conditions most of us have ever lived through, small-cap investing shined. Looking back over the last 10 years, the Dow Jones Industrial Average has a 10-year annualized return of –0.45%. The S&P 500’s is –3.02%. Both indexes were decimated by 2008, contributing to the much talked about “lost decade” for investors. The Russell 2000, on the other hand, which is known as a small-cap index, has a 10-year annualized return of +1.72%. If you look back at any 20-year period in stocks back to 1926, small-caps did better than large-caps almost all of the time.

Is small-cap investing risky? Yes. It always has been and will continue to be. And so was a whole portfolio filled with shares of BSC…

Until next time,

Matt Mason
Analyst, Oxbury Research