What is Blue Chips?
Blue chip meaning in context of investment are large listed companies that are household names and are considered to be some of the safest stocks. However the reality in buying shares is that there is no such thing as free lunch. All investment return comes with a degree of risk. In most instances, the higher the return means greater risk taken.
Australia Blue Chip Shares
All companies the ASX 100 list on the surface can be considered to a degree to be blue chip.
Examples of blue chip companies include BHP (ASX BHP), Big 4 banks like NAB and CBA and Shopping Center owners like Westfield. Only because a company is considered blue chip does not mean that it is not susceptible to external factors that could impact the performance of the business. BHP earnings is dependent on on iron ore prices, Westfield from broader consumer income growth and banks from interest rates.
Benefits of Blue Chip Shares
One common advantage of blue chip shares is the intangible value of its moat. While the big 4 Australian banks are well run institutions that came out of the financial crises stronger than ever. They are in the position today because of the industry oligopoly structure. The smaller Australian regional banks and foreign banks in Australia have failed in chipping away from the larger banks.
A killer industry structure that clearly benefit the incumbents means that the quality of earnings are less volatile. The management just need not to mess it up.
Not all companies go to where it is today by limited competition. Most go to where they are simply because they are more well run, better in executing strategy and creating value. These are result of management quality which created what value investor call a moat. A moat around a company means profits can be better protected from competition.
Secondly, the survivor bias of the markets means that companies that are better its competitors and those that are able to withstand the test of time will rise to the top. Over a longer time frame they become blue chips.
Our investment approach
We don’t invest on brand names. Only because a company is well known, a global reach and household name does not it is the best ASX stock to buy now and even be considered in our portfolio.
We are fundamental focused investors which means the merits of each position in our portfolio is based on the attractiveness of current valuation, quality of management, future business and industry prospects.
Some key perspectives of analyzing a company includes:
1. Business quality – is the company one of the best in the industry? Does the management have a track record of strategy execution?
2. Earning sustainability – earning stability does not mean predictability. It means are the current earning quality can be sustained over the long run. The key question after establish that the business has a solid foundation is to consider if there structural headwinds for the industry. What is its value proposition and growth in the total addressable market. This means that if its earnings are cyclical flow and ebbs with the market like real estate development (ASX LLC), earning sustainability is its comparative advantage of adding value throughout the cycle.
3. Solid financials – If a company is well run from the business side, are we comfortable with its capital structure? over leverage companies is a strike out from the start.
The perception of safety usually means that investors are willing to bid up the stock and usually trades at a premium to market. However overpaying assets given the risks does not usually end well.
An on going example of this include Woolworths. The company performance has been atrocious due to inability of management in actually running the business for the long term even though the Australia consumer staple industry is dominated by 3 large players.
The bias towards safety at first glance makes blue chip shares attractive for most investors however most do not dig further than the skin. There is no doubt there are a number businesses we like to own and we follow them so during market sell offs and pull backs, we are ready to pull the trigger and pick up some bargains. After investing in its simplest form is buying low and sell high.