In This Uncertain Atmosphere Participants Should Focus On Blue-Chip Issues

In This Uncertain Atmosphere Participants Should Focus On Blue-Chip Issues

$GS, $DIA

While stocks that pay the highest dividends may be tempting after the US Fed left interest rates unchanged last Thursday, participants will be better off looking elsewhere, according to Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s (NYSE:GS) Global Markets Institute.

Participants should be betting on Blue-Chip companies that have plenty of potential to boost cash flow and return on equity (ROE), Ms. Cohen said in an interview Friday. Focusing on those that return the most money to shareholders is too narrow a target, she said.

“It’s not just about dividend growth,” Ms. Cohen said. “You want to be investing in companies that generate cash and reinvest in in their own companies, and have a strong ROE. Companies that generate a lot of cash and have nothing to do but pay dividends, that is usually not where the best opportunities are.”

For now, her advice runs counter to price action in the market.

The DJIA, a proxy for Blue-Chip companies, dove 1.74% to 16,384.58 at the close Friday.

As I write, the DJIA futures are trading at:

Doubt is running through the markets after Fed Chairwoman Janet Yellen Thursday sounded caution on the economic outlook and slowing growth in China. The Fed’s statement also warned that financial developments around the world may restrain economic activity and curb inflation.

Still, Goldman Sachs has made no adjustments to its global markets view, concluding that equity valuations are “OK,” according to Ms. Cohen. Only notably higher interest rates would inspire concern about US stocks for Ms. Cohen, an unlikely case given the Fed’s dovish statements.

“Far more important is the outlook for economic growth and earnings growth,” Ms. Cohen said. “What we are looking at are Blue-Chip companies with good exposure to the United States and are selective in terms of where they do business overseas.”

Have a terrific week.

HeffX-LTN

Paul Ebeling

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