INVESTING IN BLUE CHIPS

Identifying a blue chip stock is not difficult. Ask any serious investor and he will, without batting an eyelid, reel off names of at least a dozen companies which fit the description of a 'blue chip'. Does that mean you can buy them at any price or whenever you want? Not really. A blue chip stock can get to extreme ends of the price spectrum. Your profit is the difference between your selling price and the acquisition price and your objective should be to buy as cheap as you can!

What is a blue chip stock? It is widely regarded as a safe and steady investment because it is a profit-making, dividend-paying company. It is either a market leader or a close rival. More importantly, its cash flows are robust. In short, its quality is beyond question.

We all know that quality comes at a price and blue chip stocks are expensive because they are, as a rule, in demand. Also, these stocks are very liquid and can be easily bought and sold most of the time. This is another reason why large institutional investors prefer such stocks for constructing their investment portfolios.

Rationale for investing in blue chip stocks

*Capital appreciation- If you hold these stocks for a longer period of three to five years, chances of capital appreciation improve with earnings growth, dividend, bonus and rights issues.

*Strong balance sheet- These stocks have a strong balance sheet which means the liabilities are within manageable limits and the company's borrowings are adequately covered by its net worth.

*Creditworthiness- These stocks command high credit ratings because they have the capacity to repay their depositors/creditors in time.

*Global image- These companies have expanded across national boundaries and established their footprint in several countries to meet consumer/customer aspirations. They are well-known brands all over the world. Does Coke or Pepsi need an introduction? That Nike or Reebok are market leaders in quality footwear need not be emphasised. Over years, all these brands have built goodwill and franchise to make them virtually infallible.

Blue chip stocks

Coca-Cola Co. ( NYSE : KO )- The Company is a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. The Coke brand is a household name and nine out of ten people you meet would have either tasted it or know about the company's operations. Web Site: www.coca-cola.com

Toyota Motor Corp (( NYSE : TM )- The Company conducts business in the automotive industry. It designs, manufactures, assembles and sells passenger cars, minivans and commercial vehicles such as trucks and related parts and accessories. The company's assets are its innovative products and quality initiatives. Web Site: www.toyota.com

Wal-Mart Stores (NYSE: WMT)- Wal-Mart Stores, Inc. (NYSE: WMT) serves customers and members at more than 7,900 retail units under 55 different banners in 15 countries. With fiscal year 2009 sales of $401 billion, Wal-Mart employs almost 2.2 million associates worldwide. A leader in sustainability, corporate philanthropy and employment opportunity, Wal-Mart ranked first among retailers in Fortune Magazine's 2009 Most Admired Companies survey. Additional information about Wal-Mart can be found by visiting www.walmartstores.com.

Although investing in blue chip stocks makes sense in more ways than one, one would do well to remember that in complex stock markets, sentiments change very fast. Even the best of stocks get hammered by aggressive players like hedge funds, like we witnessed in the latter half of 2008 in the aftermath of the US financial crisis. The lesson to be drawn from our recent experiences is that no stock is immune to market vagaries and even blue chip stocks become highly vulnerable to selling pressures and it is prudent to exit such stocks when the overall sentiment is extremely bearish.

Learn more about this author, Dheer Kothari.
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