True Blue And Treasured

Blue chips which can take advantage of opportunities or threats from fast-changing micro and macroeconomic forces have the best chances to continue belonging to their coveted status.

- Ramesh Bukka

Borrowed from poker, the term ‘blue chip’ refers to stocks that are leaders, most successful and tend to have the highest market capitalisation from their representative sectors in the stock market. Blue chips are well-established companies with sound financials, widely held with large institutional ownership and are very well covered, researched and therefore are well discovered. For first time investors into equity markets, blue chips can be the best bets to begin with.

Investment in blue chips is a proxy to investing into the country’s economic upsides. If one looks at the composition of broad market indices, they constitute the market leaders and best managed ones in their respective sectors. Companies do not become blue chips overnight. They have to weather all kinds of business and economic cycles and prove their execution and leadership capabilities over time to achieve their pole position. Equally important is their ability to withstand stiff competition from new and existing players.

Some of the key characteristics of blue chips are companies having proven business models with ability to weather and grow across economic cycles, good balance sheets and profitable with free cash flows, long track record of paying dividends and earnings growth. However, over the last few years, technology has made rapid strides and the ability to innovate and stay ahead have become critical for survival. Investors investing into blue chip stocks tend to look for stability, reasonable returns and periodic dividends. Dividends do not tend to be erratic. While they may be lower in years of economic recession, they tend to rise in periods of economic expansion.

Free cash flows