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    Blue Chip Stock Blues

    Just because a company is a big success now doesn’t mean that it’s guaranteed for the future. Instead, make sure you own companies that will be successes in times to follow.

    The market is full of well-known companies that have destroyed many a portfolio just because investors weren’t paying attention to the power of change.

    Blue chips: This is the term for companies that are supposed to be solid now and for decades to come. You’re supposed to be able to buy and own these and rest assured that you’re invested in industry and market leaders that will successfully grow in value without too much volatility and market risk.

    Too many individual investors buy so-called blue chip stocks without taking the time to get to know the companies behind the stocks and what might cause them to stumble and falter. They just hold and hope that everything will work out as advertised.

    But, too often, that doesn’t end up very well.

    Take a few of the former blue chips of the past. Remember Kodak? It was the company that was all about being the market leader in its industry, and it was supposedly going to keep bringing the next great series of products and services that the world couldn’t live without.

    Polaroid took what was supposed to be Kodak’s products and tried to take them to the next level. And, of course, both of these imaging and technology companies are really no longer with us. Think about the millions of shareholders who saw their blue chip companies go from the top to nothing and the impact that that had on their retirement portfolios.

    Then there’s Palm, the leader in smartphones and early touch-screen tablet devices from decades ago. It was one of the stocks that was showing up in countless mutual funds and investment accounts. Now, it’s all gone.

    You don’t want to be holding the bag when markets begin to realize that a company’s products are becoming obsolete. Yet millions of investors have done that — perhaps a few times over — all because they bought into the hype of the safety in buying big and popular stocks called blue chips.

    The key is to know what you’re investing in and why you’re buying it in the first place and to keep asking that question every time you open your brokerage statements. Don’t just follow the investing herd.

    When it comes to technology investing, for decades, any list of companies at the top of the heap has included Intel Corp. (INTC). The company has been famed for its chip sets and other products and services that for a time were ubiquitous in nearly every personal computer sold worldwide.

    As a result, for the 1990s through 2000, shareholders saw returns soar to the heavens with gains of more than 4,100 percent. No wonder it was not only a blue chip but also on most short lists of tech stocks to own.

    But with any market — especially technology — things change.

    Not only does competition emerge, but the markets change in demand for goods and services. From 2000 through the end of 2010, Intel stockholders lost more than 55 percent of what they had gained in the prior decade.

    During the current decade, Intel has gained only a measly 4 percent. Meanwhile, the Standard & Poor’s 500 index — even with all of the general market foibles — is up by more than 36 percent.

    And its peers in the PC market are faltering: from chipmaker Advanced Micro Devices, Inc. (AMD), which lost 75 percent so far this decade, to PC software maker Microsoft Corporation (MSFT), which is down more than 7 percent, to PC maker and vendor Dell, Inc. (DELL), which is down another 2 plus percent. Being tied to PCs, from desktops to laptops, has been a bad market in which to be trying to make a positive return.

    While no one is going to say that PCs are going completely the way of Polaroid, Palm or even Kodak, there is a warning here. More and more folks are using PCs less and mobile computers more. From smartphones to tablets, this is where demand is coming at a more heated pace for the chips, components and software.

    Intel has been trying to be relevant, but it just hasn’t been working. And while it thinks that it’s being a generous dividend payer (at about 22 cents a quarter), it’s hoarding a lot of cash that it might need to stay alive unless changes are made.

    This brings us to Apple, Inc. (AAPL). This company’s stock has shown up in seemingly every sort of mutual fund, from the most conservative to the most aggressive. Even value- and dividend-focused funds have been buyers of this stock, even though it hardly qualifies for either criterion.

    But do most investors understand the business model of the company or what the product development cycle is? And what is going to continue to justify the higher valuations for this technology and media content company?

    What has been hitting Intel, Microsoft and Dell might well be starting to chip away at Apple: a loss of its edge in knowing what the market wants before it knows what it wants and, in turn, delivering the well-engineered goods in innovative packaging.

    This is perhaps why Apple is beginning to be questioned, with the trailing six months showing losses for shareholders amounting to more than 32 percent or an annualized loss of more than 63 percent.

    Meanwhile, as a comparison, look at Samsung Electronics Co. Ltd. (SSNLF). This company has continued to eat the lunch of its competitors. With its focus on mobile devices, it’s been trouncing Intel and its PC-fixed peers for many years. And it makes components that its peers need to buy to assemble most, if not all, of their goods — including Apple products. It also has a very successful business of building its own branded products.

    And while Apple has been slipping over the past six months, Samsung continues to perform up more than 20 percent, equating to an average annual return that’s a mirror opposite to Apple’s losses as seen in the graph below.

    Samsung vs. Apple

    And this recent performance is no fluke. In the past 10 years alone, shareholders have made more than 472 percent in total return. Samsung continues to bolster its sales gains year in and year by consistently predictable advances. In turn, the market continues to recognize the company’s performance with higher stock prices.

    The key in this contrast is that you need always to look forward with every stock that you own. Forget what worked before; always ask what is more likely to work in the future and invest accordingly. Just because a stock might be a blue chip now doesn’t mean that it will always stay in the black; it might eventually put you and your portfolio into the red.

    –Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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