Those Blue-Chip Blues

Knowing where the term came from still does not give it form. If truth were told, in fact, a hard and fast definition is difficult to come by. The consensus seems to be that a blue chip is the stock of a financially sound company with large market capitalization. A blue-chip company is well established, stable, and likely to be around for a while. Stock in blue-chip companies should not carry a lot of risk. The stocks of these companies are purchased to ensure a steady growth and income for the widows and orphans fund.

The Dow Jones Industrial Average (DJIA) is currently made up of 30 large-cap, blue-chip stocks. It is easy to equate large capitalization with the designation of "blue chip." Unfortunately, this is not always the case. Just because a company's books show good profits, or because they have a float of millions of expensive shares, does not make it a blue-chip stock. Indeed, it may only mean they have a close and dirty relationship with their auditor, great liars in their publicity department, a major brokerage firm touting them to gullible clients, a pack of slick lawyers, a captive investor base, and a coverup good enough that their corruption has not yet been caught.

If all that seems harsh, see if you recognize any of the following names: Tyco, Enron, WorldCom, or Global Crossing. At one time or another, all of these companies had large market capitalization and high ratings from Wall Street analysts. These stocks were being stuffed into pension funds with complete confidence, based on the fundamentals available to the investing public.

Now the corporate facade, designed in deceit, built with bad business administration, brushed blue, hyped by major brokerage houses, and supported by crooked accounting, has all come tumbling down. These companies, and quite a few others, are now just smelly piles of BS (blue-chip shame).

FRAUD YET UNEXPOSED

The misery of thousands of trusting employees and the ruined retirement of millions of busted investors is all that is left of these once-trusted (in terms of fundamental reputation) blue-chip castles. Now that the truth has emerged, we know that they were only large-cap fortresses of fraud. Further, anyone who believes that all of the dirty doors along the Wall Street corridors have been fully opened still has his or her head in the sand (or elsewhere). There may be a good many other seemingly secure corporations whose fraud has not yet become exposed.

How about a lesser-known company like Microstrategy? In March 1999, when its stock price was above $330 per share and its chief executive officer, Michael Saylor, was a media darling from CNBC to 60 Minutes, it would have been a good bet that many considered its stock came in shades of royal blue. Alas, had you held your Microstrategy stock to the end of its fall, your loss would have been pretty much total.

Then there's HealthCentral.com. At over $718 in January 2000, it would have been difficult to dismiss HealthCentral.com shares as anything other than pure blue chip. Well, those chips turned brightest red as the stock later dropped down to less than a dollar.

Plenty of other companies have been considered to be blue-chip stocks just by the look of their fundamentals, only to have their stocks fall to mere fractions of their previous value. Sadly, some of these really may be blue chips. Even the bluest of the biggest blue chips have taken huge hits: A couple of the giants, IBM and Microsoft, have lost about half of their value at some point in the last two years. IBM has traded above $134 and as of this writing is below $67. Microsoft has been over $110 (not to mention splits) but is currently under the $48 level. Xerox went from around $60 down to around $4.50. Amazon topped out at about $100 (actually about $300, but there were splits), and bottomed somewhere close to $6. What if these truly are the market's safest blue chips? It looks like they might be.

Here are the names of some other former blue chips. They may sound vaguely familiar: American Can, International Harvester, Sears, Woolworth, and Westinghouse Electric . These were all members of the DJIA in the past 20 years. It is still possible to buy Sears stock, though it was dropped from the DJIA in 1999. The rest are gone completely. Some of them were picked up by conglomerates for pennies on the dollar as those chips changed from blue to white to red.

CAVEAT EMPTOR?

I started out to write a buyer-beware sort of essay. However, as my research mounted and the stories of market scams and losses painted their dreary picture, a technical analysis adage kept coming to mind: "Everything an investor needs to know about a stock is in its price." You can bet the change you have left in your pocket that there were more fundamentalist-brand investors who followed the aroma of cooked books from blue chips to blue spirits than there were technical analysts.

I didn't intend this to be a blatant commercial for technical analysis. However, the reality of today's market and the corporate corruption that has already become evident — even in some of the largest and most trusted suppliers of fundamental information — must give pause to those who still choose to invest based on hearsay rather than on reality. Unfortunately, the fundamental bottom line is based on facts that can be disastrously manipulated. If anyone ever needed proof, such proof is now available in bulk.

Make no mistake, the major brokerage and clearing houses can and do manipulate the price of both stocks and commodities. We need look no further than the recent $100 million settlement between Merrill Lynch, one of the world's foremost brokerage firms, and the US government to assure ourselves of that.

But even with those manipulations, the price line on a technical analysis chart clearly shows where reality currently resides. Once you see that chart, you can make a decision based on your own analysis rather than depending on a spreadsheet written by someone whose self-interest concerns them more than the truth that is going to affect your quality of life and your retirement.

The bottom line, unplanned but unavoidable, is this. When making financial or investment decisions that will affect your lifestyle, always take a good look at the information the price action of stocks holds. Don't end up fundamentally blue.

Bruce R. Faber is a Staff Writer for Working Money.

Microstrategy, www. turtletrader.com/indicator.html

HealthCentral.com, www. forbes.com/2001/10/05/1005nasdaq_2.html

See also: www.post-gazette.com/westinghouse/prologue.asp

www.e-analytics.com/dowchang.htm

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.