Blue Chip Companies: The safest stock to invest in the stock market…!!
An investor takes a risk in the stock market depending upon their investing experience. But it’s quite important to access its style. There are mainly two types of investor style i.e. Hare or Tortoise. Hare investor goes after high flying stock or those who are darling of the moment, while the tortoise investor prefers solid, well-established stock with a long history of stable and solid returns. Tortoise investors tried to win the race with a slow and steady pace, while hare investors may rack big gains in the beginning, but tend to fade in the long term. That’s the reason most of the investors tend to prefer the Blue-Chip Companies.
Blue Chip companies are mature companies that represent big names of the industry. It has features such as stable earnings, high quality, less volatility, and good return. They are stalwarts of industry or the top performers in the sectors. They have built a brand over time and survived multiple downturns in the economy. That gives them a tag of ‘’stable companies ‘’, which is likely to be in any investor portfolio. Conservative investors with a low-risk profile or nearing their retirement will usually go for the blue-chip stocks.
Key features of Blue-chip companies:
- Enormous Size: Blue chip companies are large in size. They predominantly constitute a large part of the market share due to their enormous size.
- Established Company: An established company is mainly defined by its ability to grow its EBITDA over a long period.
- Powerful Management: These companies tend to have strong management which can easily be verified through the balance sheet.
Reason to invest in blue-chip companies:
Blue-chip companies tend to provide stable earning over a consistent period. If the stock has stable earning, then it means the top management of the company is doing good and the future is quite good in the immediate time. So, for any investor who wants to avoid volatility and high risk, blue-chip companies are a good investment.
Apart from the fact that Blue-chip stocks are less risky, they also provide a great level of diversification. For instance, if you have invested in a risky stock, which have a greater chance to fail, these companies can help you cover up some of your losses.
Competitive Brand Advantage:
Blue-chip companies tend to have a stronghold and their presence can be felt in the daily lives of the common people. This gave a good advantage to the company as well as to the investor, in case if it goes through bad times. Consumers’ confidence doesn’t shackle quickly, as in the case of other companies. The best example is Coca Cola.
These companies tend to have strong financials. They hardly have high debt and their financial ratio is intact and is seen within the prescribed limit. This helps in less volatility, minimal risk and very limited downside risk for the investor which ultimately helps them to mitigate risk by keeping the entire portfolio into consideration.
Let’s look at some of the biggest Blue-Chip companies:
- Reliance Industries LTD
- Infosys Technologies LTD
- Bharti Airtel LTD
- Housing Development Finance Corporation
- ITC LTD
- Larsen & Toubro LTD
- ICICI Bank LTD
An investor invests in these stocks mainly due to three reasons.
- High Enterprise Value:
It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity included. Blue Chip companies stock must necessarily have higher enterprise value. Generally, the formula of EV (Enterprise Value):
EV = Market capitalization + Debt – Current Cash
- High Profitability:
The high profitability of the company can be determined by profit generated per unit cost. The best measure of the profitability of the company is through ROC and ROCE. Blue-Chip companies generally have high profitability.
- Low Debt :
Debt is one of the most important criteria in the selection of bluechip stocks. Lower the debt better will be the company’s performance in the future. A low debt to equity ratio will always be considered for a blue-chip company.
Apart from large institutional investors, blue-chip stocks are a must for the common investor too. To screen Blue Chip stocks, one needs to look at these financial ratios.
- ROCE (Return on Capital Employed)
- ROE (Return on Equity)
- Debt to Equity Ratio
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing