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Blue chips: down, but not out

Tracey Samuelson Oct 23, 2014
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It’s been a rough week for some venerable names in the American economy – McDonald’s, Coca-Cola, and IBM all reported very “meh” results.

They’re the old guard – the “blue chips” – the companies investors count on for solid, steady growth. In the dating pool, blue chips would be the nice guy, who returns your calls, drives his mom’s old station wagon, and gets you home at a reasonable hour.

Historically, they were big, well-known companies, often in consumer goods, like Procter & Gamble, General Motors, General Electric and General Mills, says Lawrence White, an economics professor at the N.Y.U. Stern School of Business.

“Lots of generals in there,” he jokes.

But even blue chips can fall, says White, recalling General Motors’ bankruptcy.

“The stock holders of the old General Motors came out with nothing,” he says.

As the market pushed higher and higher in recent years, it wasn’t blue chip companies leading the charge, says Quincy Krosby, a market strategist for Prudential Financial.

But she does expect them to gain strength and hold onto investors.

“Even the companies that have been disappointing, they’ve got cash on their balance sheets,” she explains. “So they’re going to try to fix the problem and they’re going to pay investors, most likely, for waiting while that happens by offering dividends.”

Still, time marches on, says Joshua Brown, the CEO of Ritholtz Wealth Management. Tomorrow’s blue chips might be a tech stock like Facebook, or Chipotle, perhaps Under Armour.

“They certainly have blue chip status amongst the younger generation and if they can continue to execute the way they have, we may well be looking at the next generation of Blue Chips,” says Brown. “In order for that to happen, some of the older companies have to go away.”

Brown’s optimistic that McDonald’s and Coca-Cola will now hustle to catch up with consumer changes and reinvent themselves, though he cautions it won’t happen overnight.

Should they need inspiration, they might look to Nike.

“Nike’s a great example of a blue chip that remains a blue chip through a lot of different changes in taste and preferences,” he says. 

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