Blue Chips Aren't Always the Long Term Best

This week's announcement by General Motors (GM) of a massive employee buyout deal, one more chapter in the rocky decline of what was long the largest company in the world, should serve as a reminder that the bluest chips of yore aren't necessarily sound long-term investments.

This is not to suggest that you dump your savings into emerging market micro-caps — far from it. But today's economic powerhouses can be tomorrow's struggling sectors. Just look at airlines, steel, the auto industry, among others.

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Of the ten biggest U.S. companies in 1994, as measured by the famous Fortune 500, half ran into trouble or were forced to significantly readjust their business model in the ensuing decade.

Those ten were, in order, General Motors, Ford (F), Exxon, Wal-Mart (WMT), AT&T (T), General Electric (GE), International Business Machines (IBM), Mobil, Sear Roebuck and Philip Morris.

Profits slipped dramatically at General Motors and Ford. Both now earn less than a number of smaller companies. Sears Roebuck, the 9th ranked company in 1994, fell to number 45 in sales for 2004 and lost $507 million to boot. Philip Morris, now part of the Altria Group (MO), International Business Machines and AT&T (which dropped from 5th to 56th in sales), all had to rethink their business models in the face of shifting demand, pressure from overseas and other fundamental changes in the global economy.

Can we expect the same turmoil in America's biggest companies over the next decade?

It should be no surprise that oil, banking and insurance companies are in the top ten in terms of revenue, and many are doing very well in term of profits, too. Exxon Mobil raked in top profits of $25 billion in 2004 and Wal-Mart, which topped the rankings in revenue, now feels like a natural part of the scenery in Anytown, USA.

But the economy is moving faster than ever and some sectors, like oil, remain very volatile. Take a lesson from the decline of America's auto makers: heed the future and invest in companies that do so as well.

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