Blue chip stocks have been left behind in this huge market rally, but their time is about to come.
Bargains aren't as plentiful as they used to be, alas. The FTSE 100 has, after all, soared more than 30% since touching its March lows.
By way of recompense, there is the likely fact that, if you stuck it out like all good Fools should, you're probably 30% (or more) wealthier than you were in March.
And who knows? You might even be back on track to retire when you planned to.
One Small Problem
Your investment plans were no doubt predicated on continuing to earn, if not 30% in a matter of months, then something approaching the market's historical average of roughly 10% per annum.
But here's a dirty little secret: You're going to need to earn more than that, much more.
Invest £10,000 a year over the next 20 years at that rate and, yes, you'll have roughly £630,000 at the end of the period. That figure, however is "nominal," not "real," which is just a fancy way of saying it doesn't account for inflation, a beast that hit its highest level in nearly a year last month.
Factor that in, and the purchasing power you'll have with your seemingly fat nest egg could be less than £350,000.
How Not To Proceed
That ugly calculation is why investors often gravitate toward riskier fare during inflationary periods, gambling that the potential downside risk outweighs the guaranteed erosion of purchasing power that inflation ensures.
Logical? Well, yes -- at least as a general principle. It even looks like it has held true in this most recent debacle.
Riskier fare has shellacked more conservative plays over the last few months. Just take a look at the table in Six Index Beating Tips showing how "junk" companies like Pendragon (LSE: PDG) and Johnson Press (LSE: JPR) have soared as much as 1,140% since the March 2009 bottom. Compare this to boring old Vodafone (LSE: VOD), up just 7% over the same period.
Unfortunately, though, this growth-fuelled rally isn't sustainable.
Much of the rally action has been among distressed concerns. The likes of heavily indebted companies like Enterprise Inns (LSE: ETI) and Yell Group (LSE: YELL) have been on a tear -- up 265% and 91% respectively since the market bottomed -- despite falling revenue.
Fizzle and Fade
But just because the shares of the hour are bad bets doesn't mean you're relegated to true value stocks like Reed Elsevier (LSE: REL), BP (LSE: BP), and Astrazeneca (LSE: AZN).
Yes, the Reeds, BPs, and Astrazenecas of the world can -- and, for my money, should -- form the foundation of your portfolio. But if you want to earn outsize returns -- the kind that allow you to eat well, sleep well, and spend well into the early stages of retirement and beyond -- you'll need to stock up on high-quality growth companies.
Here's One Growth Company
Tesco (LSE: TSCO) is not the most obscure company around, but based on its dominance of the UK supermarket scene and its growth profile, you would think the shares should trade on a premium rating.
Wrong.
Tesco shares trade on a very modest forward P/E of just 11. Their forward dividend yield is a very respectable 3.9%. And the best part of all -- it is still growing. In the middle of June, Tesco said "Group sales for the 13 weeks ending 30 May 2009 increased 12.6%, excluding petrol, driven by all parts of our strategy. Growth was 9.7% including petrol."
In such a tough economy, those growth figures are nothing short of amazing. If Tesco can make hay amid high unemployment and moribund levels of consumer spending, it should continue to do so when the economy inevitably improves.
One Of The More Attractive FTSE 100 Companies
Tesco, as it happens, is on the "watchlist" of our Motley Fool Champion Shares investing service. In his most recent update on Tesco, he labelled them "…as one of the more attractive businesses in the FTSE 100." If you'd like to sneak a completely free, no-risk peek at the whole of Champion Shares, including Maynard's very latest tip, just released, simply click here: Thirty days of unfettered access to the complete service awaits -- and there's no obligation to subscribe.
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A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
