In investing, everyone wants big rewards with low risk. Blue chip stocks seek to offer that powerful combination through the companies that have established themselves as the leaders of some of the most profitable industries in the global economy. Because of their dominance of their respective industry niches, blue chip stocks tend to have competitive advantages that can feed into further growth opportunities. Yet most blue chip stocks have long enough histories that they’ve established their ability to survive through good times and bad, avoiding the flameouts that weaker rivals often end up succumbing to before falling out of the limelight.
Not everyone agrees on the exact definition of a blue chip stock. Some delegate the responsibility of establishing which stocks qualify as blue chips to S&P Dow Jones Indices, which is responsible for coming up with the 30 stocks that make up the Dow Jones Industrial Average (DJINDICES:^DJI). It’s certainly the case that just about every Dow component has worked hard to gain admission to the venerable stock market benchmark, and the list includes the leaders of many prominent industries. Because of that fact, you’ll find members of the Dow Jones Industrial Average among the five blue chip stocks discussed below…
However, by nature of the methodology that S&P Dow Jones Indices uses to select Dow components, the average will inevitably leave out some of the most prominent, highest-quality businesses on the planet. If you want the best of the best in blue chip stocks, it’s worth going outside the Dow to consider some other leaders in their fields with strong prospects for growth extending well into the future…
5 top blue chip stocks
|Stock||Headquarters||Industry||10-Year Cumulative Total Return
|Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)||Omaha, Nebraska||Financial||223%|
|Caterpillar (NYSE:CAT)||Deerfield, Illinois||Heavy equipment||299%|
|Walt Disney (NYSE:DIS)||Burbank, California||Media/entertainment||530%|
|Starbucks (NASDAQ:SBUX)||Seattle, Washington||Coffee||1,150%|
|UnitedHealth Group (NYSE:UNH)||Minnetonka, Minnesota||Healthcare||923%|
Let’s take a closer look at these five companies to see why they’re among the cream of the crop even in the rarified air of blue chips.
1. Berkshire Hathaway
Berkshire Hathaway is one of the most popular stocks in the market, and the primary reason is CEO Warren Buffett. Buffett’s prowess as an investor has earned him the moniker of “the Oracle of Omaha,” referring to Berkshire’s corporate headquarters, and the company’s success has made it a clear blue chip in the financial industry.
Berkshire’s roots as a textile company date back to the 19th century, but Buffett’s purchase of a majority stake in the business in 1964 marked the turning point for the company. From there, Berkshire started to incorporate insurance operations, and over the first couple of decades of Buffett’s ownership of the company, Berkshire increasingly got itself involved in providing different types of insurance.
Berkshire’s operations are vast and cover a lot of territories. At the core of its business remains Berkshire’s insurance and reinsurance division, which primarily offers property and casualty insurance to domestic customers. However, the scope of Berkshire’s insurance business is a lot bigger than that, with its acquisition of financial services company Gen Re and insurance provider GEICO in the 1990s adding international commercial exposure; other reinsurance lines in areas like life, accident, and health insurance; and personal lines in the auto and homeowners areas. Subsequent expansion has added specialty items like bond insurance and coverage for special events like promotional sweepstakes prizes.
Beyond insurance, Berkshire has assembled a conglomerate of companies in different industries. You’ll find wholly owned industrial companies like railroad giant Burlington Northern Santa Fe and aircraft charter service NetJets, as well as consumer favorites like restaurant chain Dairy Queen, chocolate maker See’s Candies, jewelry retailer Ben Bridge Jeweler, and Nebraska Furniture Mart. Other units of Berkshire offer real estate services, building products, apparel, and utility services.
One reason why Berkshire Hathaway works so well as a blue chip stock is that it also has extensive holdings of publicly traded companies. In the financial industry, Berkshire’s top stock holdings include American Express, Wells Fargo, and Bank of America, and the company has a history of providing assistance to financial institutions — especially during the financial crisis in 2008. You’ll also find extensive positions in Apple, Coca-Cola, and a host of airline stocks among Berkshire’s holdings, showing the importance of diversification in Buffett’s investing style.
Buffett’s overall philosophy has been a key component of Berkshire’s success, and the way he invests informs how Berkshire operates. Buffett invests for the long run but can recognize when he’s made mistakes in assessing the long-term prospects of a business, and he won’t hesitate to sell off a position even at a loss when it no longer meets his investment criteria. His interest in buying stocks in companies that he understands well plays to his strengths, and he always takes valuation to heart in deciding whether to pull the trigger in buying an investment. Often, you’ll find Berkshire on the other end of what seems to be popular wisdom, taking contrarian positions that can turn out wonderfully for Buffett and his company. The way in which the Berkshire CEO informs himself about current events that are relevant to the business world gives him a unique perspective from which to assess opportunities, and much of Buffett’s success stems from his ability to remain patient and simply wait rather than jumping at an investment that isn’t an ideal fit for Berkshire.
In many ways, investing in Berkshire is like investing in the entire stock market, because the scope of Berkshire’s empire is so large. That provides the stability that investors in blue chip stocks like to see, but Berkshire shareholders also get the benefit of Buffett’s insight and reputation. Even at 88, Buffett’s dedication to his company is unparalleled, and his commitment lends much to Berkshire’s blue chip status.
Caterpillar’s history as a company dates back to 1925, when two pioneers in the tractor industry, C.L. Best and Benjamin Holt, joined forces and released a product line of five tractors. It didn’t take long for Caterpillar to extend its reach to build a wide range of heavy equipment, and the industrial powerhouse quickly became important parts of what made large infrastructure projects like the Hoover Dam and the Golden Gate Bridge possible.
Now, Caterpillar provides equipment used for the broadest possible range of applications. The company’s tractors, excavators, backhoe loaders, graders, wheel loaders, and off-highway trucks are favorites for customers in the construction, mining, forestry, infrastructure, transportation, and energy industries. In order to assist customers with making equipment purchases, which can require substantial capital, Caterpillar also has an internal financing and insurance division to offer attractive terms to would-be buyers. The company has become a global behemoth, with manufacturing operations in more than 100 different facilities in about two dozen countries across the world…
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