Blue Chip shares
The real truth

Blue Chip shares... the core of many portfolios,
with a sometimes disappointing performance?
Aren't they supposed to be reliable winners?

What does blue chip really mean?

The ASX web site currently (post-GFC) 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 could look at the definitions for "large cap" companies versus "medium cap" or "small cap" companies, but there is no standard definition for this. There isn't a list of "larger" companies. So 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" - is it just a few years? or ten years? or longer?

"...profitability..." - So, how do we define profitability? Is this the amount of 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? And to what degree are they profitable? If we look at ROE, for instance, do we want to see a 10 percent Return on Equity over just three years? or maybe over 5 years? or 10 years?

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

So, we can see that this definition of blue chip is very vague, and it doesn't really tell us anything substantive about a company that is labelled as a blue chip.

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 might be similar to a list from another source, but it probably won't 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. And so this label was applied to companies that were considered to be highly valued.
(BTW - These days the blue chip still is the most highly valued in some casinos, but not in all casinos.)

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 by mid-2011 (when this web page was first posted) some 3 years later many of these blue chip stocks were 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 could have been waiting a long time.
 
Then there was the end of the resources boom which hit very hard in 2015, and resulted in a commodities downturn, and many mining and resources stocks suffering sharp price declines.

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. Also included are other companies that suffered surprising declines at various times

See the material below for details.

More information

See more details about the blue chip stocks that have fallen at various times (will prompt for Toolbox member username and password):

• Blue chip shares are disappointing?; 
• Blue chips that fell > 50%;
• Blue chips that fell with long time to recover;

Share Market Terminology

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Who is Robert Brain?

And whatever you do,
beware of the sharks in the ocean! class="ht14"

Conclusion?

1. Don't forget that the opinions of the market participants are summarised in the price charts. If enough participants have a particular view about the stock, then it is reflected in the price chart (it pays to understand the stories in the price charts).
2. Blue chip stocks might not be all they are cracked up to be.
3. Blue chip stocks might give us reasonable dividends over time, but their capital improvement value might be impaired.
4. 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.
• It pays to understand the stories in the price charts (technical analysis).
• Are you Share Market Ready? - A checklist of things to help you on your journey.