6 Blue-Chip Stocks On Sale
In this crazy market, many high-quality companies are selling at relatively cheap prices. Our favorite: Microsoft.
Despite many troubling developments around the world, the U.S. stock market has marched merrily upward. From late August through December 9, Standard & Poor’s 500-stock index advanced 18.5%. Yet interest rates have risen materially, notwithstanding the Federal Reserve’s latest round of monetary-policy easing. Since early October, yields on ten-year Treasuries have jumped 34%, to 3.2%. Higher interest rates raise the cost of borrowing, making fixed-income investments more competitive with stocks and usually slowing economic growth.
There’s more. The U.S. unemployment rate has climbed to 9.8%. The housing market has worsened, with sales slowing and prices weakening. The European debt crisis has reappeared, requiring a bailout of Ireland and raising new concerns Spain, Italy and Belgium. Last but not least, North Korean military forces shelled South Korea, the world’s 15th-largest economy, raising tensions in one of the world’s most-volatile areas.
Two Explanations
Had you told us that all of these things would occur in recent months, we would have confidently predicted lower stock prices. So what explains the market’s glad tidings? We believe there are two answers: fundamentals and froth.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Although unemployment remains a vexing problem, corporate earnings have been strong and the overall economy is showing some signs of life. That said, the data remains mixed and we still think the most likely scenario is that the economy will muddle through for several years, with growth at a weak annual rate of 1% to 2%, a stubbornly high unemployment rate of 7% to 9%, and continued high government deficits. Based on historical precedent, the stock market under this scenario would likely return no better than 2% to 5% annually.
We believe that leaves froth as the biggest driver of the market’s recent surge. By froth, we mean a burst of unfounded optimism triggered by a don’t-fight-the-Fed mentality and a frenzied enthusiasm for companies showing high growth, whose stocks have soared irrespective of valuation.
Our advice: Don’t be enticed into a sucker’s game of chasing the hottest stocks, and instead invest in high-quality, blue-chip companies with global businesses, powerful brands and market positions, strong cash flows, rock-solid balance sheets and healthy dividends. Normally, you have to pay a rich price for such high-quality businesses, but today quality is on sale. We can’t explain why, but are happy to take advantage of it.
As of early December, six of our nine largest positions -- all of which we’ve written about in previous columns -- fall into this category: Anheuser-Busch InBev (BUD, $57.20), Automatic Data Processing (ADP, $46.53), Berkshire Hathaway (BRK.B, $80.49), BP (BP, $42.79), Kraft Foods (KFT, $31.09) and Microsoft (MSFT, $27.08).
If we were to choose one favorite today, it would be Microsoft. The consensus among most investors is that Microsoft is a lumbering dinosaur, which like newspapers, check printers and paging companies before it, is on the wrong side of technological advances that will relegate it to the dustbin of history. The problem with this view is that there is no evidence for it. Microsoft’s market share in its various businesses is stable or rising. Driven by strong results in each of its key businesses -- the Windows operating system, Office software and the server and tools division -- revenues in the quarter that ended September 30 were up 13% from the year-earlier period, while earnings per share rose 19% (adjusted for the deferral of Windows 7 revenues in the September 2009 quarter).
At its current price, Microsoft shares -- after deducting the $3.85 in net cash on the company’s balance sheet -- are available at a net cost of about $27.08. At that price, the stock trades at just 12 times the previous 12 months’ earnings of $2.32 per share. This for a dominant company with prospective percentage earnings growth in the mid teens, 31% net profit margins and one of the strongest balance sheets in the world. In a stock market that is exhibiting signs of irrational exuberance, Microsoft’s shares are insanely cheap.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
S&P 500 Hits New High on Jobs Friday Eve: Stock Market Today
The S&P 500 hit a new all-time closing high and most of the stocks in the Dow Jones Industrial Average were up the day before a critical jobs report.
-
New $6,000 'Senior Bonus' Deduction: What It Means for Taxpayers Over Age 65
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
9 Warren Buffett Quotes for Investors to Live By
Warren Buffett transformed Berkshire Hathaway from a struggling textile firm to a sprawling conglomerate and investment vehicle. Here's how he did it.
-
Can President Trump Fire Fed Governor Lisa Cook?
Markets hate uncertainty, especially when it comes to monetary policy and interest rates, and questions about the Fed are compounding.
-
A Timeline of Warren Buffett's Life and Berkshire Hathaway
Buffett was the face of Berkshire Hathaway for 60 years. Here's a timeline of how he built the sprawling holding company and its outperforming equity portfolio.
-
Powell Signals Rate Cuts in His Jackson Hole Speech. Here's What Wall Street is Saying
In his speech at the Jackson Hole symposium Friday, Fed Chair Jerome Powell said current conditions "may warrant" rate cuts.
-
Berkshire Buys the Dip on UnitedHealth Group Stock. Should You?
Buffett & Co. picked up UnitedHealth stock on the cheap, with the embattled blue chip one of the newest holdings in the Berkshire Hathaway equity portfolio.
-
What Set Warren Buffett Apart
As Warren Buffett prepares for retirement, we reflect on what we've learned from his 60 years of leadership at Berkshire Hathaway.
-
Trump-Era Regulations Will Broaden Access to Crypto
The Kiplinger Letter The president wants to make the U.S. the leader in digital assets.
-
July CPI Report Ignites a Risk-On Rally: Stock Market Today
Market participants price out worst-case scenarios for tariffs and inflation and will now turn their attention to employment and growth.