Seven-Year Bets Among the Blue-Chips

Recently Jeremy Grantham of GMO Capital penned his quarterly letter to investors. It is, in my opinion, must-reading for investors and traders alike.

He very correctly was bearish as far back as 2007 and stayed that way throughout the ongoing credit crisis and stock market decline. In his latest letter, he tells investors that he expects there to be ongoing, large debt liquidation. He also says that it will take far longer to fix the problems than it did in past economic cycles.

As I do, Grantham expects inflation to rise to high levels before it is all over. He takes executives of the financial services companies, as well as a wide array of government officials, to task for incompetence in handling the crisis. It is worthwhile reading.

In spite of his fears about the recovery process, his long-term models are becoming bullish for what he calls high-quality U.S. blue-chips. He expects that these stocks will return slightly better than 11% annually over the next seven years from today's levels. He appears to be not rushing in but tiptoeing (also known as "move slow, stay small"), and he recently said that his current equity allocation was roughly 55%.

Grantham has also stated that it is very likely, in light of the ongoing crisis, that stock prices could fall to new lows before advancing. If you start buying stocks here, expect a wild ride and be prepared to hold them for the seven-year period.

Several of the big blue-chips seem to be cheap enough to buy at these levels for long-term investors. I talked last week about Walt Disney (DIS - commentary - Cramer's Take) as a potential bargain. The entertainment and media icon reported a horrible quarter recently. Theme parks were down, advertising was down -- in fact pretty much every division of Disney had a bad quarter. This has driven the stock below $20 and to a price-to-earnings ratio of just 8.4.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.