Here's how blue-chip investments are made

Many a times you may have come across the term – "blue chip investment". This is a platform where investors across the board scramble for safety in times of a jittery stock market.

Brokerage firm Motilal Oswal Financial Services has just come out with a report on this christened as Wealth Creation Study (WCS) that defines blue chip investment as follows:

"Blue chip investment involves buying and selling blue chips (i.e. high quality stocks) at right price. ‘Blue chip stocks' is a common term used for highly priced stocks, which typically tend to enjoy premium valuations due to their high quality. They are also sometimes referred to as bellwether stocks."

Before we delve deep into the blue chip investment parameters, let us take a quick look of some common features of bellwether stocks:

• Large cap companies in terms of revenue and capitalization
• Widely tracked and researched stocks
• Easy entry and exit due to ample liquidity
• Highly priced stocks in terms of premium valuations and ticket price

So, what’s the mantra behind successful blue chip investment?

Ramdeo Agrawal, joint managing director of the brokerage firm stated the following reasons in the note:

1. Making sense of blue chip valuations by observing their earnings growth, dividend payout ratios and price earnings.
2. Buying them based on valuation signals, which have back-tested evidence.
3. Following a “buy-and-hold” strategy to enjoy the long term rewards of dividends and capital gains.

The brokerage has earmarked 48 companies as blue chips. It has shortlisted those stocks after applying six screening filters.  They are just 1.5% of the 3000 plus actively traded stocks in India.

In the last 12 years, BSE Sensex  is up by 13% CAGR or 7x while most of the blue chips in the 48 stock bucket rose above 20% CAGR. Sesa Goa shares shot up 61% CAGR, the highest, while Wipro shares fell just 1% CAGR, the lowest.

Six screen filters to select blue chips:

• Twenty years of uninterrupted dividend payouts
• Dividends raised in at least five out of last 12 years
• Earnings growth in at least seven out of last 12 years
• Average return-on-equity (RoE) of at least 15% for the last 12 years.
• At least 5 million shares floating suggesting big liquidity and trading volume
• A company should be owned by at least 80 institutional investors.

Key reasons for blue chip venturing to create wealth

• Good quality companies: safety of your principal amount
• Far less risk: permanent loss of capital is zero
• Strong dividend histories: handsome return on the principal
• Growth potential than poor quality companies

A quick glance of some blue chip performance in last the 12 years:

saikat.das@network18online.com