CHICAGO (AP) — The dizzying slide of some of Wall Street's most ironclad stocks has called the entire concept of blue-chips into question.
Despite Tuesday's market-wide rally, Citigroup Inc. remained only a day removed from penny stock territory and many other longtime blue-chips were valued at a fraction of what they were a year ago. American International Group Inc. and General Motors Corp. are among those that also have fallen below or neared $1 per share.
"This market brings into question a lot of widely held assumptions like buy and hold, and the concept of blue-chip is one of those," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati.
Here are some questions and answers about blue chips, including insights that may help retail investors decide whether to assess them differently:
Q: What is a blue-chip stock?
A: The traditional definition is the common stock of a nationally known company with a long record of profit growth and dividend payments and a reputation for quality management, products and services. In short: The stock of America's best large companies that many like to buy and hold onto for the long haul.
But the connotation of it being a rock-solid investment has been shaken by the dive of some iconic stocks within the past year. Among them, Citigroup shares plunged 96 percent in 11 months to as little as 97 cents this week and General Electric Co.'s fell 85 percent to a low of $5.73 over a similar period.
Q: What is the origin of the label?
A: Blue-chip stocks are said to have taken their name from the poker table, where the blue chips are the most valuable. Dow Jones & Co. says the term was coined by its staffer Oliver Gingold in 1923 or 1924 when he was standing by the stock ticker at the brokerage firm that later became Merrill Lynch. Noticing several trades at $200 or $250 a share or more, he said he needed to return to the office to write about "these blue-chip stocks."
Q: Can a blue chip lose that status?
A: Certainly. There is no official list of blue chips, but it's clear that some will no longer have any reason to be called that. "At the moment, anything that's heavily dependent on the financial side is not a blue chip," said Erick Maronak, chief investment officer of Cleveland-based Victory Capital Management.
But it will take some time to assess their permanent status. IBM Corp., for example, fell from investors' good graces after the 1987 market crash but managed to transform itself and return to true blue-chip status by the mid-'90s.
General Motors Co. may have lost the label for good, with its dramatic downsizing in the midst of the auto industry's meltdown. But some observers say banking giants such as Bank of America Corp. shouldn't be written off for good, even though its stock tumbled from above $50 a share around the time of the market peak 17 months ago to a recent low of $2.53.
Q: Have blue chips fared any better or worse than the stock market as a whole?
A: It depends on the sector. Blue-chip financial stocks, Citigroup included, have fared far worse. But IBM Corp. was down "only" 26 percent from the market's high-water mark on Oct. 9, 2007, as of Tuesday and Exxon Mobil Corp. 27 percent, both faring considerably better than the overall market's 54 percent drop during that period.
Paul Larson, equities strategist and editor of Morningstar StockInvestor, says the blue chips as a group still occupy relatively high ground in the market equivalent of the worst flood since the 1930s.
"When you're in a 75-year flood," he said, "would you rather be on ground that's getting a little bit wet or on ground that's 10 feet under water?"
Q: How much of a role do dividends play in what's regarded as a blue chip?
A: The dividend is perhaps the easiest gauge to assess blue-chip status. "A dividend is something that's tangible — you know whether the company is paying one and whether it's going up, sideways or down," said Bill Staton, chairman of Staton Financial Advisors, a money management firm in Charlotte, N.C.
Numerous blue-chip companies, such as Pfizer Inc., JPMorgan Chase & Co. and Dow Chemical Co., have put that label in jeopardy by joining others in slashing their dividends this year to retain cash during the recession.
Q: So what blue-chip stocks are left that have clearly retained that status?
A: Looking at one indicator, numerous market stalwarts with a record of increasing dividends for at least 25 consecutive years have taken action to raise them again this year. This group includes 3M Co., Archer Daniels Midland Co., Coca Cola Co. and Wal-Mart Stores Inc. That of course doesn't guarantee they won't cut them the next time around.
Q: In the recession, are investors making a mistake if they put too much faith in a blue-chip designation?
A: Experts are divided on this point. Morningstar's Larson remains a blue-chip backer: "Blue chips are still blue chips. It's just a more exclusive club than it used to be."
But Sparks of Schaeffer's Investment Research maintains there aren't any at the moment: "It's tough to say there really are stocks that you buy and you hold and you never get rid of. I think we have moved into a different era."
Q: So it seems blue chips are either a bargain or a bust right now. How do you know which?
A: The key is to take no stock for granted and to assess them individually based on cash flow, balance sheet and future business prospects.
Jamie Cox, managing partner of Harris Financial Group in Colonial Heights, Va., says the proven blue chips are on sale right now and those who think the concept is dead will be proven wrong.
"The best products and the best services generally are provided by these companies," he said. "That's how you invest. Everything else is Las Vegas in my opinion."
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