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. Last Updated: 07/27/2016

No Highs Too Dizzying For Blue-Chip Investors

LOS ANGELES -- How does that old line go? "I love you more today than yesterday. But not as much as tomorrow."

That pretty much sums up the way Wall Street feels about big-name, U.S. blue-chip stocks as they roll from one new high to another this fall, rewriting the book on bull markets.

Consider IBM shares, which recently passed the 150 mark and last week crested 160, and have already gained over 70 percent this year.

What's the stock really worth? Try 170 sometime in the next 12 months, argues Steven Milunovich of Morgan Stanley & Co. Too low, says Daniel Mandresh, Milunovich's rival at Merrill Lynch & Co. Mandresh said he thinks the price could hit 195 in 1997.

We're into the Battle of the Price Targets. Does anyone hear 250?

Who knows where all of these raving bulls were when IBM was at 71 in 1995. That was then and this is now -- and now, America's most recognizable multinational stocks are simply the right answer to every investment question. Strong economy? Buy blue chips. Weak economy? Ditto. Rising interest rates? Falling interest rates? Ditto, ditto.

As money continues to pour into stock mutual funds, those blue-chip names -- IBM, Merck, Procter & Gamble, General Electric and a relative handful of others -- seem to be the only logical destination for the dollars. At least that's the way many portfolio managers are acting.

That's apparent from the performance of the 30-stock Dow Jones industrial average, which has zoomed to record after record, leaving the index knocking on the door of 6,500 less than two months after it topped 6,000 for the first time. The index's 1996 gain has far outpaced that of every other major U.S. stock index, and most foreign stock indexes as well.

Yet many Wall Street brokerages see no end soon to the Dow's glory days. Indeed, investors' love affair with blue chips meets with widespread approval among Wall Street pros, many of whom have come up with their own proprietary lists of stocks that they consider worthy of a new "Nifty Fifty" -- a reference to the blue-chip issues that were the one-decision stocks (i.e., just buy 'em and hold 'em) of the early 1970s. Today's Nifty Fifty lists usually have in common such names as Intel, Microsoft, Gillette, Merck and GE.

Morgan Stanley calls them competitive-edge companies -- "the most successful, best-managed companies [which] continue to extend their reach" worldwide. The idea now, as in the early '70s, is that some companies are just so good at what they do that their growth prospects are virtually unlimited.

That may, in fact, be true enough for some businesses. But for investors, there's still an issue here: There is a "fair" price to pay for a stock at any given moment, relative to the earnings the company can be expected to generate in the immediate future. The more you pay relative to earnings, the greater the distance the stock could fall if something goes wrong with the business, or if investors' perception of the business' value changes.

But how high is too high for the stocks? Who knows, the bulls ask -- except that they're confident the final highs will be above today's prices.

Lehman Bros. strategist Jeffrey Applegate argues that all the worry over valuations is overblown. If this period of low inflation, relatively low interest rates and consistent economic expansion continues, he says, then blue-chip valuations can expand further. For the most part, he says, they still haven't reached their peaks of 1958-72, the last similar period.

Then what? Nobody's thinking about that. For now, as one fund manager notes, "Acrophobia is a disease we're wiping out on Wall Street."