Making it big with Blue Chip Investment
A question that every common man has: Why not put the money in some productive uses rather than just saving it? This question gives rise to the concept of investment. It is the best way to get returns from the money. Various investment opportunities await with lucrative returns yet, the decision lies in the hands of the investor. The dilemma while investing in the stock market is genuine as it is about money that we invest to get the stipulated returns.
One of the most popular and profitable investments is through investing in Blue chip companies. On the stock exchange, blue-chip stocks are considered to be high priced and dominant long-term investment strategies. So, these blue-chip stocks are stocks of eminent blue-chip firms.
The inception of the word “Blue Chip”
The word Blue Chip was discovered in 1923 by Mr. Olive Gingold. It is used to refer to highly-priced stocks. Recently, it has been used to define the stocks which have humongous value in the market.
According to the market capitalization, there are multiple blue chip companies whose stocks will generate good returns in the long run. Here is a list of blue chip stocks that are faring well in the stock market:
Indian Tobacco Company (ITC) Limited
Hindustan Unilever Limited (HUL)
Tata Consultancy Services (TCS)
Oil and Natural Gas Corporation (ONGC)
Housing Development Finance Corporation (HDFC)
Sun Pharmaceuticals Industries Limited
State Bank of India (SBI)
Why invest in a Blue-chip company?
While investing in any regular stock is always an option yet, a lot of perks are associated with investing in blue-chip stocks
Consistency in returns
Blue-chip companies protect the interests of the shareholders as they have more stable earnings over a duration of time. The reason behind the stable returns underlies the solid foundation and sustainable management strategies of the organization. Assortment of risks
Blue-chip stocks are more favorable for investors who prefer to averse risk. The stability of those companies in the market gives them an advantage that every investor has the stocks of such companies in their investment portfolio. But when investing in risky blue-chip stocks, investors can reap the benefits of reducing losses, because these firms are known for their operating performance and good financial safety.
Systematic payment of dividends
This is one of the key factors that determine the position of a blue-chip company. Coherent dividend payments provide extra revenue over the initial investment. When an investor spends a significant chunk in a blue-chip stock, this investment revenue will also be gained in the form of a dividend income.
Highly liquidated stocks
Blue-chip securities are extremely competitive as they are mostly traded on the stock exchange by corporate and institutional investors alike. An investor who needs cash can confidently sell his stock, knowing that there will always be a purchaser at the other end of the transaction.
Brand awareness and value
The goodwill and the brand value Blue chip companies hold is commendable. The brand awareness is quite high. At least many of the people might be knowing the companies due to its goodwill and brand. So, this attracts investors to invest in such stocks that would give them high returns trusting on its established identity.
Firm financial position and growth prospects
The financial statements and the balance sheet of the Blue-chip companies are well maintained and show impressive figures. The business model and the cash flows of such companies attract investors.
Coffee Can Investing
The emergence of coffee can be investing has an intriguing tale behind it. The concept loops back to Old West America, where people would place all their precious belongings in a coffee can under the mattress and not even touch them for a long time until the centralized banking system was implemented. The Coffee-Can Investing includes stocks of high-quality franchises that sustain their strategic advantages over a long period despite being confronted with obstacles and disturbances at regular intervals.
Source: Marcellus investment
The above figure consists of the current output of the PMS (Portfolio Management Services) and offshore (USD-denominated) portfolios. Twenty-five companies that were covered under the Marcellus investment portfolio have consistently provided a high degree of stability in ROCE (Returns on Capital Employed) and revenue growth levels. There are several reasons for the concentrated portfolio of companies with an estimated average vesting period of 8-10 years or longer performing above par.
Read more about coffee can investing here.
Prices and Power
Pricing power is the capacity of a company to raise commodity prices without any declining effect on the consumer base. Many businesses are raising commodity prices to demean the effect of inflation on the cost of raw materials and operating costs. Nonetheless, other companies reduce commodity price spikes over a prolonged period.
Bharti Airtel: Over the Financial year 2007 to Financial Year 2017 (i.e. before Reliance Jio), Bharti Airtel remained a market leader with a market share of 23 percent. The ARPUs (Average Revenue Per Unit Customer) declined by -8% in the last 10 years.
Interglobe Aviation: In the airline industry, Interglobe Aviation (Indigo Airlines) has increased its market share over the last decade from 15 percent in the Financial year 2010 to 50 percent in the Financial year 2020 with revenue per passenger increasing at just 1 percent over the 10 years.
Asian Paints: Asian Paints has dominated the painting industry for many decades with a total market share of 50%. Over the last two decades, the company has raised its commodity prices by less than 3%.
Lal Pathlabs: Dr. Lal Pathlabs is India's largest pathology diagnostic team. In over four years, the organization has not raised its diagnostic test rates.
Sharing the common problem
The common factor among the four examples is obvious that despite inflation in various costs incurred at the same time, these companies have not increased their commodity prices in several years. But the gap in their pricing power is not so obvious. Dr. Lal Pathlabs and Asian Paints, on the one hand, for more than a decade, have delivered ROCEs with a rise in earnings by more than 20 percent compounded annually. This is a symbol of massive market force. Bharti Airtel, on the other hand, has consistently produced ROCEs below 15% with an inconsistent rise in income over Financial Year 2007-2017 which is an indication of low pricing powers.
Have you ever wondered why companies who exercise incredibly high pricing powers opt to avoid any further price hikes?
The competitive advantage of the companies holding a high pricing power scatters around different factors that involve differentiated products, quality of supply chain, trademarks, new technologies, improved consumer awareness, a regulatory environment, and raw materials management. However, the differentiating strategies that these companies exercise are that they mainly focus on structures and processes, organizational efficiencies, high-quality management committees, technical empowerment, engineering investments, and an ability to avoid further price hikes.
Source: Marcellus investment
The above figure shows the relationship between price hikes and pricing power. The firms which lie in the first quadrant of the 2x2 seem to be the worst hit as they have a low pricing power which in turn leads them to face fierce competition and decrease in profitability. One of its rivals has strong pricing power in Quadrant 2, which prevents the weaker players from suffocating by restricting price increases for the commodity. The companies with relatively less sustainable positions lie in quadrant 3. The firms who lie in quadrant 4 either have a propensity to move to quadrant 2 or they would face troubles in sustainability.
The above graph shows the growth of the investments and the growth of returns of Mirae assets which is a large-cap company. The progress through the 10 years has been tremendous. Any investor who had purchased stock in the financial year 2010 would have good returns over the period. The returns have increased to 401.5358%. So, when a person holds the stock for 10 years then he/she would get around 401.5358% increase in the investment.
The above table also represents an ideal scenario wherein the selling value of the investment is 400% higher than the initial investment and a profit of 356.54% is earned by the investor.
The above figure shows the SIP returns of Mirae assets. The earnings have increased throughout the years and it shows the profitability that an investor would experience by investing in SIP of Mirae asset.
Another example for a better understanding would be Nippon India Pharma Fund. The asset under management of the Nippon India Pharma Fund is INR 2,851 crore. The return through SIP that an investor would derive in 10 years would be 13.66%. It is due to the strategy adopted by Reliance to position Nippon according to the Indian mentality and at the same time focusing on organizational efficiency.
Investing in Blue chip companies: ease-out job
The Price Earning ratio jumps into a higher value when it is overvalued and the company has under-performed in a certain quarter of the year. An investor would rather invest in ease in Blue chip stocks irrespective of the high PEs. In the short term, or even in the long term, massive PE stocks would have greater benefit potential. At the same time, investors might wonder how long will it take to conquer the market position and growth potential as before. It depends on how optimally an investor looks at the scenario. The Price Earning ratio of such companies wouldn't be so high if there weren't enough people who found this stock worth it to invest their money in it.
It is one of the reasons why blue-chip stocks irrespective of high Price Earning ratios value are sold or are overvalued at a premium. Before investing in these stocks, an investor should consider the various factors such as management efficiency, growth rate, etc. to ensure good returns.
Once the factors are evaluated, then it would be an easy job to invest in blue-chip stocks. Since the blue-chip companies are high grossing companies and the stable cash flows and financial position would bring in more growth, and the commendable strategic management unit of such companies are quite strong. This would help in uplifting the value of the stocks shortly.
Author: Arushi Mallick