December 28, 2004  Email this  Print this
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Blue Chips Are Back for 2005
 In spite of everything, 2004 has turned out to be a good year for stocks. With just a couple of trading days left, the S&P 500 is up more than 10%, including dividends. That's right in line with the historical average. But among other indexes, it gets interesting. Thanks largely to the falling dollar, foreign stocks clocked U.S. stocks for the third straight year. The EAFE index returned almost 20%. And emerging markets returned a few percentage points more than that.
Meanwhile, small-cap stocks beat large stocks for the sixth straight year, with the major small-cap indexes returning just under 20%. Small-cap-value stocks returned about 22%, while small-cap-growth stocks returned about 14%.
For me, the most interesting returns -- in terms of divining what may happen in 2005 -- are among large-cap stocks. Undervalued large caps returned a healthy 15%, but large-cap-growth stocks returned only about 6%.
When you look at the broader stock and bond markets -- from tech stocks and REITs to junk bonds and TIPs -- large-cap growth stocks (i.e., stocks of high-quality companies with premium multiples) stand out as the only real bargains.
Stuart Freeman, chief equity strategist at A.G. Edwards, agrees. "We believe investors will increasingly look towards quality versus more speculative companies," he says. "We also believe the balance will swing toward larger-capitalization companies (versus small-caps) that have tended to lag."
Quality picks
If you're a fund investor, my favorites, in descending order, are T. Rowe Price Growth Stock (PRGFX), T. Rowe Price Blue Chip Growth (TRBCX), Marsico Focus (MFOCX) and Marsico Growth (MGRIX).
For stock investors, A.G. Edwards has just put five new stocks on its focus list. St. Louis-based Edwards is one of my favorite brokerages because they do very little stock underwriting, which jeopardizes objectivity. Individual investors are this brokerage's bread and butter, so they get treated well.
Analyst David Stumpf likes Citigroup (C). With $1.4 trillion in assets, it's the largest bank in the U.S. Citigroup is among the least interest-rate sensitive banks, and it operates in almost every area of financial services. Opportunities for growth abroad are immense. Yet the company trades at just 10.5 times Stumpf's 2005 earnings estimate.
Analyst David George likes a smaller, but extremely well-run bank holding company, Fifth Third Bancorp (FITB). With more than 1,000 branches in the Midwest and parts of the South, Fifth Third has generated nearly 30 years of double-digit earnings growth. George expects 10% earnings growth in 2005, yet the company sells for just 15 times his 2005 earnings estimate -- a discount to the S&P.
Analysts David Wong and Aaron Rakers like IBM (IBM), the biggest supplier of information technology services in the world. They expect better than 10% long-term earnings growth, yet the stock sells at the same multiple as the S&P -- 17.5 times 2005 earnings estimates.
Analyst Jason Gere likes Procter & Gamble (PG), the steady-Eddie consumer products company that owns brand names such as Tide and Pampers. Gere thinks earnings will grow about 11% annually in coming years. The stock trades at a P/E of 19 -- the low end of where it has traded over the past decade.
Analyst Tony Boase expects 10% earnings growth for United Technologies (UTX) over the long term. But the shares trade at a P/E of 16, a slight discount to the S&P. United Technologies owns a wide variety of companies -- including Pratt & Whitney, Carrier, Otis, and Chubb.
You don't often get the chance to buy quality companies like these at market or below-market multiples. Right now is one of those rare times.
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