If my Stealth Blue Chips portfolio, which I created in 2003 and supplemented last year, continues to perform the way it has, the stocks it contains won't be anonymous much longer.

The average gain for these 11 stocks was 25.4% through March 24. That compares with an 11.6% return for the

Standard & Poor's 500

since Oct. 14, 2003, when I picked the first eight, and a 7.1% return for the index since I added three more on July 21, 2004.

Of course, stocks that make the list get put through the wringer. Only 65 stocks of any market capitalization pass the first step in the test. And, once I've winnowed down that number, only 10 stocks, out of all the stocks in the MSN Money database, make the cut. Even five out of last year's list of 11 didn't make the grade in 2005.

I only hope that the 2005 Stealth Blue Chip list that I'm introducing with this column does half as well.

Many 'Blue-Chips' Are Anything But

I began this list on a belief that conservative equity investors weren't being well-served by existing lists of blue-chip stocks.Look at the list of the 20 most widely held stocks by individual investors at Merrill Lynch, and you'll notice a lot of familiar names:

Time Warner



Agere Systems



Lucent Technologies



Verizon Communications

(VZ) - Get Verizon Communications Inc. Report

and, of course, such old standbys as

International Business Machines

(IBM) - Get International Business Machines (IBM) Report


Home Depot

(HD) - Get Home Depot, Inc. (HD) Report


General Electric

(GE) - Get General Electric Company (GE) Report


All in all, the list is a tribute to investors' tendency to equate familiarity and size with safety and solid investment returns. When we go looking for blue chips, we tend to look for big companies with names we recognize, figuring that they're too big to fail and are such fixtures on the economic landscape that they must be solid investments that will outperform the average stock. But because these stocks are so familiar, they're likely to dominate mature markets and sport huge market capitalizations that make outperformance unlikely.

Take GE, for example. The embodiment of a safe blue chip to many investors, it has shown falling returns on assets since the end of 1999. The stock is down more than 31% since the end of 1999. Home Depot, once a blue-chip growth star, is having trouble finding a strategy that can deliver consistent growth. Shares are down 44% in the same time period.


(INTC) - Get Intel Corporation (INTC) Report

is having trouble not only recovering the ground it lost after the technology bubble broke in 2000, but in sustaining the highs it set near the end of 2003 and beginning of 2004. The stock is down 67% in the last five years.

The Wall Street Sales Machine

The problem with these popular blue-chip names is that once a stock is on Wall Street's radar, it gets turned into "product" by the Wall Street sales machine. Stocks like these are always "buys," never "sells." They become the target of legions of analysts who, whatever the opinion they issue, keep the stock in the eye of the buying public. The effect is to push the price-to-earnings multiple ever higher until exhaustion sets in.

Look through the most widely held list, and you'll see a solid dozen stocks that have been lousy performers in recent years simply because their price-to-earnings ratios got so high that the stocks needed to tread water in price while earnings grew so that the ratios could return to earth. With some solid ground under its feet, a stock price will eventually get moving upward again. In the meantime, those years of underperformance surely mean that a stock such as


(MSFT) - Get Microsoft Corporation (MSFT) Report



(PFE) - Get Pfizer Inc. Report

doesn't provide the consistency that investors look for in a blue chip.

All of that is why I went looking for the qualities that investors want in blue chips among stocks that aren't yet on the very top of Wall Street's product list.

Let's go through the rules of this Stealth Blue Chip screen again for those who have come in late.

To make the first cut:

A stock's market capitalization had to exceed $288 million. That market cap, which puts the stock in the top half of all stocks by market capitalization, makes sure the stock is liquid enough for an exit, if one is necessary.

At the same time, the stock's market capitalization had to be less than $10 billion. I do that to find stocks that are flying below Wall Street's radar. Don't worry: You're not missing out on many big-cap blue chips because of this requirement. Only two stocks with market capitalization above $10 billion get past the other requirements of this screen:


(SYK) - Get Stryker Corporation Report


UnitedHealth Group

(UNH) - Get UnitedHealth Group Incorporated Report


Annualized earnings-per-share growth had to be above 10% on average for the last three years. In addition, the company had to show positive earnings growth per share

in each of the last four years

. This last requirement is a killer, but it does find stocks of companies that grow year in and year out. That's the kind of consistency I'm looking for in a blue chip of any size.

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Annual returns from the stock had to be in the top half of all stocks for each year stretching back to 1998. And, in the very tough year of 2002, the stock couldn't show a loss of more than 13%. That would put the shares in the top quarter of all stock performance that year.

For the year to date, the stock's return had to be above a negative 2.6%. That would put its return among the top half for all stocks in 2005 so far.

Finally, the stock had to be in the top-performing quartile in total return for all U.S. stocks over the last five years.

After that, I did stock-by-stock due diligence on the 63 stocks that passed this screen. In my due diligence, I looked for the stocks of companies with the potential to sustain the outperformance of the past for the next five years. If the record of the past five years was built on conditions, such as rapidly falling interest rates, that seemed unlikely to be repeated over the next five years, I took the stock out of the running.

Five of the stocks on the 2004 Stealth Blue Chip list didn't make the cut this year. Dropping off the list were

Affiliated Computer Services



Brown & Brown

(BRO) - Get Brown & Brown, Inc. Report





Kinder Morgan Energy Partners



Main Street Banks



Here's the complete 2004 list with gains or losses since I added it to the Stealth Blue Chip list below.

For the 2005 version of the Stealth Blue Chip list, I've decided to limit membership to 10 stocks. That will make it easier to calculate and report on the portfolio's performance in the future.

My four additions to the Stealth Blue Chip list for 2005 are




L-3 Communications

(LLL) - Get L3 Technologies Inc Report


Patterson Cos.

(PDCO) - Get Patterson Companies, Inc. Report


Strayer Education

(STRA) - Get Strategic Education, Inc. Report


The six stocks on the 2004 list that made the grade again for 2005 are

Applebee's International



Chico's FAS

(CHS) - Get Chico's FAS, Inc. Report


Donaldson Co.

(DCI) - Get Donaldson Company, Inc. Report


Expeditors International

(EXPD) - Get Expeditors International of Washington, Inc. Report


Penn National Gaming

(PENN) - Get Penn National Gaming, Inc. Report


SCP Pool

(POOL) - Get Pool Corporation Report


I'll report on the performance of the 2005 Stealth Blue Chips about halfway through the year.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: CUNO, Main Street Banks, and Microsoft.