NEW YORK -- With today's stock market resembling a minefield -- formerly invincible companies Philip Morris, Nike and even whiz kid Home Depot seem to be blowing up once every couple of weeks -- patient investors may feel that buy-and-hold companies are a thing of the past.
Although many Wall Street companies have shied away from picking the sort of steady winners that ordinary investors crave, two Baltimore investment companies think they have found the answer, and have recently started mutual funds to invest in these current and future stars.
In June, T. Rowe Price & Associates Inc. started its Blue Chip Growth Fund, and last month, Legg Mason Wood Walker Inc. began its American Leading Companies Fund. Both funds are targeted at conservative investors who might feel more comfortable with the readily recognizable companies that the funds hold.
Both also have similar goals: find companies that use strong balance sheets, quality management and a dominant niche to survive the tremendous purges taking place in U.S. industry. While the funds are too young to compare, they do shed insights into the economic changes that are affecting all Americans -- investors or not.
"There's a tremendous change in the way that business is being done in this country. A lot of it started around the margins in the 1980s, but it's now affecting virtually every sector of the economy," said J. Eric Leo, head of Legg Mason's fund.
"The common thread that we focus on are companies that prize efficiency and which can prosper even during tough times," said Thomas H. Broadus Jr., of T. Rowe Price.
What happened with the old blue chips is that they failed to adapt to several sea changes in the U.S. economy, Mr. Leo said. For example, new technologies have made it possible to be more efficient, but many companies have failed to take advantage of these changes, Mr. Leo said. While Macy's for example, failed to computerize its ordering system until recently, Wal-Mart has a sophisticated computer inventory and ordering system.
Another change: Low-cost competitors, and cost-conscious consumers, make it much more difficult for big-name companies to boost earnings simply by raising prices. Recently, Philip Morris Cos. decided to slash prices in the face of generic cigarette competition. The move dropped the company's stock price 23 percent in one day.
Philip Morris' problems reflect a deeper demographic change than just the effects of recession, Mr. Leo said. As baby boomers age, they try to save more. This puts a premium on value and cuts into the strength of brand names, he said.
While Mr. Leo has only just started purchasing stocks for his fund -- and so does not want to tip his hand before he makes his buys -- he does point to AMP Inc. as an example of a company that interests him.
A Pennsylvania-based maker of computer switches and connectors, AMP is four times larger than its nearest competitor. Like International Business Machines Inc., it was also a leader in the 1980s, but quickly took advantages of leaner production methods to double its output while cutting its work force 25 percent, Mr. Leo said.
"Both were leaders, but AMP quietly went through a gauntlet of restructuring that left it still dominant in its field. That's the sort of company we're looking for," Mr. Leo said.
An important consideration in buying, he said, is that the stocks not be overpriced. This would make him reject Wal-Mart and Home Depot Inc., although the latter company's stock has recently become cheaper after losing nearly 20 percent of its share-price value since August, after analysts decided that the company's growth would slow slightly.
Over at T. Rowe Price, Mr. Broadus' fund has similar criteria and, now 3 months old, has a $17.9 million portfolio of stocks that he can reveal. His fund is full of well-known companies, but some surprises as well.
Along with Whirlpool, Gillette, Pepsico, General Electric and McDonald's, the fund includes medium-sized companies such as Pittsburgh-based Integra Financial Corp., a bank holding company, and Shoney's Inc., the Nashville-based restaurant chain, said Larry Puglia, assistant portfolio manager.
Besides strong financial fundamentals and a dominant position in its industry, Mr. Broadus said he is looking for companies with seasoned management. An example, he said is Sandy Weill, the CEO of Primerica Corp., who has consistently run profitable financial services companies and recently merged his company with Travelers Corp.
By contrast, IBM's management "didn't know what it was doing," he said. As a private portfolio manager, Mr. Broadus said, he dumped IBM's stock long before it took its dive.
A major difference with past blue chips is that today's solid companies have to grow, Mr. Broadus said. General Motors Corp. for example, was considered a model blue-chip corporation in the 1960s even though auto sales were flat, but today it would have a hard time qualifying even if its financial problems were solved.
Despite the changes, Mr. Broadus says he hopes to hold companies for three to five years and points to General Electric Co., Gillette Co. and Minnesota Mining & Manufacturing Co. as companies that have been considered blue-chip companies for decades and still are fundamentally sound.
Whirlpool Corp., for example, has managed to improve productivity 5 percent a year over the past five years, even with an economy "less than buoyant," Mr. Puglia said.