Blue Chips Or Potato Chips?

 

I am sure that we all know all about potato chips (Some of us maybe too much LOL) but what about Blue Chips? Many of us might have heard of the terms Blue Chips but do we actually know what they mean?

What Are Blue Chips?

Blue Chips can be broadly defined as a well-established (Normally in the mature phase of their operations) and financially sound company.

Larry Puglia of T. Rowe Price defined Blue chips as, “a company that has a leading market position, seasoned management that allocates capital effectively, and a strong return on invested capital”.

From SGX My Gateway, “Blue chips are also defined by the “Barron’s Dictionary of Finance and Investment Terms” as common stock of a nationally known company, with a long record of profit growth and dividend payment. Such companies typically have a reputation for quality management, products and services”.

 

There are many different definitions of Blue chips and that definitely fall into one of those. An interesting piece of information was that this term – Blue chip was believed to have been from poker, where blue are generally the most expensive chips!

Blue Chips are generally in the businesses of selling high-quality products and/or providing widely accepted products and services and simply put, such companies would generally not ‘surprise’ their investors too much in terms of operational results. In turn this would provide the investor with a certain level of confidence and comfort

 

What Are Some Examples Of Blue Chips?

 

Banking giants like United Overseas Bank Ltd (SGX:U11), Oversea-Chinese Banking Corp. Limited (SGX:O39) and Bank of China (HKG:3988) would definitely come to mind.

Certain huge infrastructure players like Singapore Telecommunications Limited (SGX:Z74), StarHub Ltd (SGX:CC3) and the electrical juggernaut of Malaysia mentioned by Stanley – Tenaga Nasional Bhd (TNB:MK) also belong in this league.

More often than not they are also considered as defensive counters able to weather downturns which in turn contribute to their long record of stable and reliable ‘growth’. Think ComfortDelGro Corporation Limited (SGX:C53), a Singapore based-transportation linked company operating globally in segments inclusive of bus, rail, taxi, inspection and testing service, etc. Another would be huge conglomerates in the consumer staples arena – Dairy Farm International Holdings (SGX:D01) with operations sprawling from the supermarket all the way to the restaurant business!

 

But Given Their Price, How Do We As Retail Investors Buy A Basket Of Blue Chips?

Blue chip counters are normally a good portfolio diversifier, to provide a certain degree of stability to one’s portfolio. However the impediment for most young investors that have just started would be the cost factor.

Take for example, the Straits Times Index (“STI”) was made up of the 30 of the largest companies by market capitalization that are listed on the SGX. Say for example you are interested in UOB – as at Nov 14, 2014 a single lot (1,000 shares) of UOB share at S$23.29 per share would require an outlay of a whooping S$23,290! This would be a huge chunk out of most young investors that are just starting out.

However there are some options available for those of us with tight purse strings and would still like to own a basket of these Blue chips:

 

1)    We could simply purchase the index

By purchasing the index – STI ETF (SGX:ES3) we would get exposure to not one but 30 of the largest market capitalised shares of the STI! And this could be done of just a mere S$3,350 per lot as at Nov 14, 2014. This was just 14% the price of a single lot of UOB.

By purchasing the index, you would eliminate the trouble of trying to “beat the market” because you are essentially the market!

 

2)    But if even investing S$3,000 up-front is too much of a burden, fear not!

In 2013, POSB launched an initiative called the POSB Invest-Saver where with just an investment of S$100 per month you could have the option to invest in two of the following funds:

a)    ABF Singapore Bond Index Fund: The first bond ETF in Singapore

b)    Nikko AM Singapore STI ETF: Tracking the performance of Singapore’s top 30 Blue chip companies (Based on market capitalisation)

 

This was tailored towards investors that:

a)    May not have a huge capital

b)    Want to potentially grow their long-term savings (It is a form of a Regular Savings Plan)

c)    Looking to diversify their portfolio

d)    Seeking a relatively simple way to invest

 

Another such option for exposure to the Singapore market would be through OCBC’s Blue Chip Investment Plan (“BCIP”). Although only limited to 19 counters, what’s unique about BCIP is that you yourself as the investor get to review and select from 19 share counters to decide how much you want to invest each month from just S$100. There is also no lock-in period, which means that you can divest your shares as though it was an ETF.

 

3)    Lastly, We Can Just Wait For Jan 19, 2015

What happens on Jan 19, 2015? On this day, retail investors like you and me would be able to start buying shares listed on the SGX in smaller lots of 100 shares instead of 1,000 shares!

Let us again take UOB as an example. This meant that we could purchase UOB at just S$2,329 – a much more affordable level than S$23,290! There is also a lower limit of each transaction to cover at least S$500.

Some implications that might occur from this development would be:

a)    Result in more demand in these companies that were previously out of reach to many beginning retail investors

b)    Result in SGX having an increased liquidity in the market of such Blue Chips

When it is all said and done, I personally was of the opinion that this was a welcomed move to increase liquidity in the system and a small victory for people who want to take a stake in Blue chips that due to financial constraints they weren’t able to.

 

Value In Action

Investing a portion of your portfolio in such Blue chips might be an avenue to explore if you are looking towards diversification. And I am sure that all of us can see the benefit of investing in Blue chips rather than potato chips.

However if you are interested in potato chips, the next time you much down on one of these, you can look towards Pringles – Owned by Kellogg Company (NYSE:K), Lay’s – owned by PepsiCo, Inc. (NYSE:PEP) and Kettle – Owned by Diamond Foods, Inc. (NASDAQ:DMND) the next investment opportunity while filling your stomachs 😀

 

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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.

 

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