November 16, 2012 at 10:40 AM EST
Blue Chips: What Earnings Growth Is Saying About Buying Them

Blue ChipsThe stock market is oversold, and geopolitical events in the Middle East aren’t helping. The continuing story among financial results is about decent earnings with revenues on the light side.

The S&P 500 has crossed its 200-day simple moving average (SMA), and if it doesn’t recover soon, 1,325 on the index is a real possibility. The NASDAQ Composite has fared even worse, breaking down more due to the tremendous weakness in technology stocks. The stock market is on the cusp of correction territory.

Valuations among many blue chip companies are becoming very attractive in this stock market. But earnings estimates keep coming down, particularly for 2013, and it makes it difficult to be a buyer with declining expectations.

Caterpillar Inc. (NYSE/CAT) is the perfect example. This stock was a strong market leader until it broke down in April. The position hit a 52-week high of $116.95 back in February, and is now trading very close to its 52-week low of $78.25. The company’s current price-earnings (P/E) ratio is well under 10, and the stock has a current dividend yield of 2.5%. But while seemingly attractive, Wall Street expects Caterpillar’s earnings and revenues to decline next year. So, do you buy this great company now because its shares are attractively priced? I wouldn’t.

cat stock market chart

 Chart courtesy of www.StockCharts.com

Then there’s E.I. du Pont de Nemours and Company (NYSE/DD) which is a high-yielding Dow Jones component that just fell off a cliff on the stock market. (See “What Many Blue Chips Are Signaling.”) I actually view du Pont as being oversold in this market. The company’s dividend yield is now around four percent because the stock is down almost 10 points after reporting disappointing third-quarter earnings. This year and next, the company’s earnings are expected to come in lower than in 2011, with revenues following suit. The company’s stock chart is below:

dd stock market chart

Chart courtesy of www.StockCharts.com

So, if the current downward trend in the stock market continues, valuations among blue chips are going to become extremely attractive. But does this mean investors should buy? I say no; not because dividend yields aren’t attractive, but because investment risk is too high. With expectations for flat earnings and revenues, cash seems like a better alternative. Dividends provide decent income, but the risk of a falling stock market, in my mind, is too great over the near term.

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