Blue Chips Shine In Third Quarter

By Sham Gad | October 04, 2010 AAA

Investors certainly seemed to be betting on quality names. In the third quarter of 2010, the Dow Jones Industrial Average gained nearly 11%, up by over 1,000 during the three month stretch. Yet despite the good quarter, the Dow Jones was trying to make up for the terrible second quarter that stocks suffered. In the big picture scenario, quarterly performance is not that significant.

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Stuffed With Cash
Whether it's because of fear, conservatism or a little of both, today's U.S. corporations are holding a war chest of cash. That's an encouraging sign for many investors who are betting that companies use that cash to reward shareholders via share buybacks or dividend payments.

Cisco (Nasdaq:CSCO), a member of the DJIA, did just that in during the third quarter. Sitting on nearly $40 in billion in cash, Cisco announced that it would start paying a dividend for the first time in the company's history beginning in 2011 and anticipates a 1% to 2% initial yield based on the current price. That followed news that Microsoft (Nasdaq:MSFT) another cash gushing machine was increasing its dividend by 23%. Microsoft currently yields 2.6% and shares were up nearly 7% during the third quarter.

Quality Earnings and Valuation
During the toughest economic times, it can often pay to be big. Shares in Caterpillar (NYSE:CAT) one of the largest construction and mining equipment companies in the world, surged by over 30%, the type of gains you often see in small cap stocks. But during the recession, Caterpillar's size, quality balance sheet and global scale helped the company weather the storm. In fact, shares in Caterpillar are near the levels pre the Great Recession of 2008.

Currently, Caterpillar shares trade for over 30 times earnings, a substantial premium to the overall market.

McDonald's (NYSE:MCD), another winner during the recession due to its low priced menu items, was up 13% during the quarter, outperforming the overall index. Its shares trade for a much more digestible 17 times earnings.

Despite a 10% advance in the third quarter, shares in Kraft (NYSE:KFT) may hold the most promise. Shares in the second largest food company in the world trade for 11 times earnings and yield a very attractive 3.7%. Kraft's products will get stronger distribution in the faster growing emerging and developing markets thanks to the Cadbury acquisition. (For more, see 3 Companies You Can't Live Without.)

Random Noise
A three-month performance record is nothing but random noise in the overall investment picture. However, where many are finding the best risk/reward value today still resides with the better known blue chip type names.

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