Blue Chip shares The real truth

Blue Chip shares... the core of many portfolios,
with a sometimes disappointing performance?

What does blue chip really mean?

The ASX web site currently defines blue chip as follows:

"Larger companies with a long history of profitability and stability."

The ASX revises this definition from time to time (this version is different to the one that was posted on the web in 2008).

But what does this really mean? Let's take a look at the definition in detail.

"Larger companies..." - Okay, so blue chip companies are larger. But larger than what? We can't look at the definitions for "large cap" versus "medium cap" or "small cap" because there is no standard definition. This is a very subjective description. If we prepared a list of all companies, and sorted it by market cap, where would we draw the line to distinguish large caps from medium caps?

"...long history..." - The blue chip companies have a long history. Well, how long is "long" - a few years? or ten years? or longer?

"...profitability..." - So, how do we define profitability? Is this the profit after tax? Or perhaps profit before tax (EBIT)? What about the Return on Funds? ROE (return on equity)? or ROSF (return on shareholder funds)? Or what?

"...stability..." - How on earth do we define stability?

Does this really matter?

We are told that it is good to have blue chip companies in our portfolios.
Lots of people talk about blue chip companies.
Lots of investors have so-called blue chip companies in their portfolios.

Our broker or financial advisor might recommend that we include blue chip stocks in our investment portfolio. So, how do we find out which stocks are blue chip?

Try this - Ask your broker or adviser for a list of blue chip stocks.
They probably won't provide one - because there isn't one.
If they do give you one, ask them what qualifies a company to appear on their list.
And if they do give you a list, it will be similar to a list from another source, but it will not be identical.

How did the term blue chip come about?

Well, many years ago, the blue coloured chip in the casino was the most highly valued chip of all.
(BTW - These days it still is in some casinos, but not so in others.)

Blue chip stocks can be disappointing!

Would it surprise you to hear that blue chip stocks can be disappointing?
Their share price performance is not guaranteed.
If you want to see capital improvement, there are times when you might be waiting quite awhile.

It only takes a common old bear market, or a severe market correction, to highlight how poorly many blue chip stocks perform over the medium term. If you invest for the very long term, then that might be a different story. But for short-term capital profits we want to see shares increase in value over several months, or at most a couple of years.

During the infamous Global Financial Crisis (GFC - aka Global Credit Crunch) of 2008, many blue chip stocks fell in value, and now in mid-2011 some 3 years later many of these blue chip stocks are still well below their market peaks of 2007-2008. For anyone who is trying to simply ride out this period of poor market performance, they might be waiting a long time.

In the accompanying price charts there are many examples of Australian blue chip companies that fell in price during the GFC. Many of them fell a long way - in the order of 50 to 70 percent. And many of them are still below their highs.

See the material below for details.

Robert writes information from time to time about the market and investing. If you are not a Toolbox Member, you can register to receive useful free information as it is published. Click here to register interest For Email Marketing you can trust Privacy ensured, unsubscribe anytime. See the Testimonials - the things that people say about the Toolbox and more.

Who is Robert Brain?

And whatever you do,
beware of the sharks in the ocean!

Conclusion?

1. Blue chip stocks might not be all they are cracked up to be.
2. Blue chip stocks might give us reasonable dividends over time, but their capital improvement value might be impaired.
3. Perhaps we could sell our blue chips at an opportune time to capture our profits, and then buy back later.

• Sensible Investing - Do the investing options seem sensible?
• Contrarian Investing Redefined - It's time to consider a revised definition.
• Funda-Technical Analysis - A clever blend of fundamental analysis to identify quality stocks and technical analysis to optimise the purchase and disposal.
• Technical analysis.
• Are you Share Market Ready? - A checklist of things to help you on your journey.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

© Copyright 2011, R.B.Brain - Consulting (ABN: 52 791 744 975).
Last revised: 26 August, 2011.