Three Big Boring Blue Chips That Could Also Be Beautiful

"Sell in May and go away" has gotten out of hand. Just a month ago, equity investors were popping the corks on Dow 11,000. Cut to today -- and 620 points in the wrong direction -- and the Dow Jones Industrial Average ($INDU) suddenly finds itself in the red for 2010. The same goes for the S&P 500 ($INX) and Nasdaq Composite ($COMPX).

Truth be told, the three major averages haven't really gone anywhere in about six months. The remarkable V-shaped recovery in corporate earnings and recent encouraging economic data make a powerful case for stocks over the next 12 months or so. And yet the specter of a full-blown credit crisis on the Continent keeps spooking investors out of all but the safest securities.

As has been the case throughout the market's 13-month super-rally, lower-quality, smaller, riskier stocks have far outpaced big, stable blue chips. While the Dow topped out at a 70% gain from the bear-market bottom, the small-cap benchmark Russell 2000 ($RUT) nearly doubled, for heaven's sake.

Small-caps, of course, are getting slaughtered on the way down. That's just how it works. What risk giveth, it taketh away. Which is why it's good to see three of the biggest formerly beaten-down blue chips not only survive, but thrive, so far this year.

An Imaginary ETF

Boeing (BA), General Electric (GE) and Home Depot (HD) have been slammed off their respective 2010 highs, but individually and collectively they've far outpaced the broader market -- and done more than their fair share to prop up the Dow, of which they're all members.

Boeing, buffeted by the global downturn and disastrous 787 Dreamliner delays, is up 23% this year. Home Depot, still recovering from the housing bust, has gained 16%. GE, creamed by the financial crisis, has popped 12%. To provide some perspective, we used Capital IQ to create an imaginary exchange-traded fund of just these three stocks. As you can see from the chart, the year-to-date performance ain't bad at all.

Our ETF generated a cap-weighted return of more than 14% so far this year. The Russell 2000, by comparison, is up a bit more than 4%, while the broader S&P 500 is off about 0.4%. Even more interesting is that the recent slides in Boeing, GE and Home Depot have left their shares at intriguing valuations on a relative basis.

Implied Upsides

Boeing, with a forward price/earnings (P/E) multiple of 13.9, offers a discount of more than 17% to its own five-year average, according to data from Thomson Reuters. Analysts' average price target stands at $81. Throw in the 2.5% dividend yield, and you get an implied upside of more than 20% in the next 12 months or so.

GE is also trading at a 17% discount to its five-year average forward P/E. Take a $22 price target and a 2.4% dividend yield, and you get a projected return of more than 30%.

Home Depot shares look like they're getting a bit stretched. The stock trades at a slight premium to its five-year forward P/E and is pretty close to analysts' average target price. Still, the hefty 2.8% yield on the dividend helps make for an implied upside of nearly 14% in the next 12 months or so.

The way the market is trending these days means these shares are likely to get cheaper still. But even if it's too soon to buy the dip, it's somewhat reassuring to see that big and boring can also be beautiful -- at least in a volatile market.