"Blue chip" is one of most vague, and often the most abused, term that pervades the investment scene.
To the of thinking of most people the term "blue chip shares" has connotations of strong businesses, with dominant positions in their respective economic sectors, strong financial pedigrees (balance sheet strength, cash flow generation, track record of earnings growth), and prudent and conservative boards of directors and executives that operate within the bounds of high standards of corporate governance.
In other words, "blue chip" suggests companies that will, over time, generate above-average returns to shareholders, but with below-average risk.
However, in reality my experience has been that convention – adopted especially by the popular financial media, and by stockbrokers alike – says "blue chip" applies mostly to "large cap" companies (usually ASX100 index companies) that have been listed for some period of time...the sorts of names you see listed on commonly during the 30 second "finance report" on the evening news on Channel 9 or Channel 10. Names such as AMP, BHP, CBA, NAB, QAN, TLS, WES or WOW.
Trouble is, across the cycle of varying macroeconomic conditions, most of these sorts of notionally "blue chip" companies do not, in fact, generate returns with acceptably low risk in my opinion.
Having been a full-time investor for almost twenty years, I have noticed that the great success stories are in the minority, while the “try-hards”, the average and the simply woeful companies make up the vast majority of the market.
It has become a tenet of my philosophy that at any given time there are 2,500 shares listed on the ASX, of which maybe only 100 are truly investment grade and can create wealth for shareholders over time. And – this is critically important – of those 100 Investment Grade company’s, at any given point in time only maybe 10 or 15 are cheap enough to buy.
So just because a business is of a high-quality, that in itself doesn’t mean it will make a good investment. What will make it a good investment is what you end up paying for it. (“Quality is what you buy, Value is what you get”, goes the saying)
My one piece of advice to anyone starting out investing in the stock market is to look not so much at the potential UPSIDE available, but at what the DOWNSIDE risk is. Put another way: there are two rules to buying stocks.
Rule 1: Don’t Lose Money Rule 2: See Rule 1
Its cheesy, I know, but it’s true.
Getting back to our list of the top 100 stocks listed on the ASX. Below is my view, having monitored most of these stocks for many, many years, of whether or not they have the ability to generate shareholder value over time, i.e. are they “Blue Chip”, or not.
I find it quite sobering that only 19 companies in the ASX100 I have found certainly do pass the blue chip test, i.e., they emerge from each economic cycle stronger and with more earnings firepower than going into it (namely ALQ, ANZ, CCL, COH, CBA, CSL, ORI, RHC, RMD, SEK, SHL, TAH, TTS, TCL, WES, WDC, WBC, WOW and WOR),
With a further 12 that probably can be classified as Blue Chip (AGK, AMP, ANN, ASX, BOQ, BEN, GNC, IAG, MND, NWS, PRY, QRN).
Then there are about 10 stocks about which I am unsure because I’m not familiar enough with their business models to be able to form a view (mostly REITS and some infrastructure stocks)
But the rest, which is about 60% of the sample; the rest in my opinion will continue to destroy shareholder wealth over time.
CAM’s ASX100 BLUE CHIP CLASSIFICATION (i.e., can the company create shareholder wealth over time? Yes/No/Probably/Uncertain):
AGL - Probably ALS (formerly) Campbell Brothers) - Yes Alumina - Definitely No Amcor - No AMP - Probably Ansell - Probably APA - Unsure Arrium (formerly OneSteel) - Definitely No Asciano - No Australian Stock Exchange - Probably Atlas Iron - No Aurora Oil & Gas - No ANZ Bank - Yes Bank of Queensland - Probably Beach Energy - No Bendigo and Adelaide Bank - Probably BHP Billiton - No Bluescope Steel - Never Boart Longyear - No Boral - No Brambles - No Caltex - No Centro - No CFS Retail Property Trust - Unsure Challenger - No Coca Cola Amatil - Yes Cochlear - Yes Commonwealth Bank - Yes Commonwealth Property Office Trust - Unsure Computershare - No Crown - No CSL - Yes David Jones - No Dexus Property Group - Unsure Downer EDI - No Duet Group - Unsure Echo Entertainment Group - No Fairfax Media - Definitely No Fortescue Metals - No Goodman Group - No GPT Group - Unsure Graincorp - Possibly Harvey Norman Holdings - No Iluka - No Incitec Pivot - No Insurance Australia Group - Possibly Investa Office Fund - Unsure James Hardie Group - No JB Hi-FI - No Leighton Holdings - No Lend Lease Group - No Lynas Corp - No Macquarie Group - No Metcash - No Mirvac Group - Unsure Monadelphous Group - Probably Myer Holdings - No National Australia Bank - No Newcrest Mining – No News Corp – Probably Oil Search – Unsure Orica – Yes Origin Energy – Probably OZ Minerals – Definitely No Paladin Energy – No PanAust – No Perseus – No Primary Healthcare – Probably Qantas – Definitely No QBE Insurance – No QR National – Probably Ramsey Healthcare – Yes Regis Resources – No Resmed – Yes Rio Tinto – No Santos – No Seek – Yes Seven West Media – No Sims Metal Management – No Sonic Healthcare – Yes SP Ausnet – Probably Spark Infrastructure Group – Unsure Stockland – No Suncorp – No Sydney Airport – Unsure Tabcorp Holdings – Yes Tatts Group – Yes Telstra – No Toll Holdings – No Transurban Group – Yes Treasury Wine Estates – No UGL – No Wesfarmers – Yes Westfield Group – Yes Westpac Banking Corp – Yes Whitehaven Coal – No Woodside – No Woolworths – Yes Worley Parsons - Yes
Note that this exercise is, by its very nature, subjective and therefore not meant to be overly prescriptive.
