What are blue chip stocks and what makes them a safe bet

Anyone who’s been around for a while knows that stock markets use a number of very unrelated seemingly random terms a lot.

Blue chip stocks is one of them.

I mean, it’s so random, right?

Why would anyone use a term like that?

How could it possibly be related to shares?

And what does it even mean?

Don’t worry. I’m here to answer all you questions and then some. Let’s start with the basics.

What are blue chip stocks?

Blue chip stock meaning:

Here’s how investopedia defines Blue chip stock:

blue chip stock definition by investopedia

The word blue chip is derived from poker

Next question.

Which human being came up with so innocuous an expression?

Oliver Gingold, who worked at Dow Jones, coined the phrase “blue chip” in 1923. Since then, the term has been used to refer to high priced stocks, but now it is used more commonly to describe high quality stocks.

These stocks generally deliver superior returns in the long run. These companies are known to have capabilities to endure tough market conditions and give good returns in good market conditions.

Are you clear on what blue chip stocks are?

It’s very simple.

Really.

Now that I’ve established what blue chip stocks are, they do sound like a good idea, don’t they?

I mean, high quality businesses with shareholder friendly managements trading at fair or better prices would definitely make excellent long term investments.

Blue chip stocks are generally market leaders in their industries and hence they have lesser potential of quick growth compared to small cap and mid cap stocks. That is why you can’t expect quick returns from blue chip stocks.

But clearly, finding these investments is not always easy- especially in today’s overvalued market.

I think I can help you out with that.

Which brings us to the next question.

Logically, the next question in your mind should be about identifying blue chip companies.

Finding the best blue chip stocks need not be complicated. Here’s how to find the best of the best:

  • Only look at stocks with yields at or above 3%
  • Examine how long the company has been in business
  • Determine fair value (use price to earnings ratio& price to book value per share)
  • Look for a strong competitive advantage
  • Invest in high quality blue chips trading at fair or better prices

Several parameters can be considered to identify blue chip companies. They include consistent annual revenue over a long period, state debt-to-equity ratio, average return on equity and interest coverage ratio besides market capitalisation and price-to-earnings ratio.

India’s blue chip companies today are State Bank of India, Bharti Airtel, Tata Consultancy Services (TCS), Coal India, Reliance Industries, HDFC Bank, ONGC, ITC, Sun Pharma, GAIL, Infosys,ICICI Bank etc.

I would just like to point out here, that although blue chip stocks sound like the real deal, nothing in the share market is set in stone. The biggest and the best companies, too, can fall.

While a blue chip company may have survived several challenges and market cycles, leading to it being perceived as a safe investment, this may not always be the case. The bankruptcies of General Motors and Lehman Brothers as well as a number of leading European banks during the global recession of 2008 is proof that even the best companies may struggle during periods of extreme stress.

Since I’ve been spending the last goodness knows how long extolling the virtues of blue chip companies, I’m sure I’ve convinced you at least to a certain extent of the soundness of these stocks.

Having said that, I also don’t think you should call your broker immediately and invest all your capital in blue chip companies.

It’s important to diversify your portfolio and invest in different companies.

While blue chip stocks are appropriate for use as core holdings within a larger portfolio, they generally shouldn’t be the entire portfolio. Within a portfolio’s allocation to stocks, an investor should consider owning mid-caps and small-caps as well. Younger investors can generally tolerate the risk that comes from having a small percentage of their portfolio in stocks, including blue chips, while older investors may choose to focus more on capital preservation through larger investments in blue chips or large cap.

Now that I’ve explained what blue chip companies are, let me give you some examples.

The best blue chip companies and the best stocks in India can be found in the Nifty-50 and BSE Sensex or in the Dow Jones India Titans 30 index.

The top three companies by market capitalization in India (as of December 2016) are:

  1. Tata consultancy services
  2. Reliance Industries
  3. HDFC Bank

I’ve also compiled a list of 20 blue chip companies in India at the moment.

  1. Bharti Airtel
  2. BPCL
  3. Dr. Reddy
  4. HDFC
  5. HPCL
  6. ICICI Bank
  7. Indian Oil
  8. Infosys
  9. ITC
  10. Mahindra & Mahindra
  11. NTPC
  12. ONGC
  13. Sun Pharma
  14. Coal India
  15. Reliance Industries
  16. State Bank of India
  17. TCS
  18. Tata Motors
  19. Tata Steel
  20. Wipro

Now, I know just picking stocks off a list can be somewhat difficult and dicey. So I’m going to tell you a little bit more about some of the blue chip companies in India.

Tata Consultancy Services (TCS)

TCS or Tata Consultancy Services is a leading name in the domain of IT services, business solutions and consulting. It is the largest software exporter in India.

Impressed yet?

Just wait.

TCS had a revenue of $13.4 billion in the 2014-15 fiscal year and its net income has been estimated to be $3.1 billion. On 26th December 2016, its market capitalisation amounted to Rs. 451,838.83 crores.

Reliance Industries

When it comes to business domain in India, Reliance Industries is one of the top-notch names. This multi-faceted company is involved in a wide array of businesses such as production and exploration of hydrocarbons and petrochemicals, marketing and refining of petroleum, telecommunications and retail segment.

This company is ranked at the 107th positon in the Fortune Global 500 List. On 26th December 2016, its market capitalisation amounted to Rs. 339,750.22 crore.

This is a big one, guys.

If you haven’t invested yet, hurry up!

Oil And Natural Gas Corporation

ONGC is regarded as the leading energy based company in India and the fifth largest of its kind in Asia.

On 26th December 2016, its market capitalisation amounted to Rs. 242,548.14 crores.

ITC

ITC is one of the leading names in the FMCG sector in India. It has been able to build and sustain a stronghold in FMCG goods, packaging, hotels, agri business, paperboards and speciality papers, and information technology sectors.

This company’s market capitalisation in 2016 amounted to RS. 272,730.64 crores.

HDFC

HDFC or Housing Development Finance Corporation Bank was established in 1994, and since then has grown like wildfire. It is currently active in 2287 cities and towns of India.

HDFC’s market capitalisation amounted to Rs. 299,977.20 crores in December 2016.

Sun Pharmaceuticals

Sun Pharma or Sun Pharmaceutical Industries Limited is probably the leading name in the Indian pharmaceutical domain. It caters to 150 markets across the world and offers more than 3000 products.

Sun Pharma’s market capitalisation amounted to Rs. 147,112.84 crores.

Infosys

Infosys is one of the leading names in the world when it comes to consulting, outsourcing, technology and next generation services. It operates across 50 countries. In 2014-15, Infosys earned a revenue of about $8.7 billion.

This company has a market capitalisation of about Rs. 225,732.24 crores.

State Bank of India

SBI is one of the top banks in India and operates outside the country as well. This public sector organisation provides banking and related financial services. In 2014, it was rated as the 73rd largest bank in the world.

SBI has a market capitalisation of Rs. 189,567.02 crores.

Almost all blue chip companies reside at the top of their respective sectors. This is something that attests to their immense adherence to a high standard of products and services over the years.

However, more than that, their real value lies in the fact that they are integral parts of the service sector, the biggest employer in India.

Also, when anyone invests in a blue chip company, that person experiences stability in regular dividend payments and appreciation in share prices.

Do you invest in the blue chip stocks?

Share your experience.

Oh, and if you have something to add or if you want to express your opinions, do feel free to leave a comment.

Happy trading/investing!

Note: The list of 20 stocks shown above is just for the informational purpose, it is not a stock recommendation by any means. Take your buy/sell decisions on your own or consult with your financial advisor.



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