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7 Feb 2016

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Hi Friends,    How to find out Blue Chip Companies?  
Blue Chip companies in India are considered most stable stocks for investing.  When one invests in blue chip stocks it’s considered best for long term returns.  Fundamentals of blue chip companies are very strong.  Blue chip companies can make profits even in bad times.  Hence expert investors give special attention to these stocks.  Blue chip stocks also display excellent dividend payment history.  When a company can distribute dividends even in bad times, it shows how confident they are about their cash inflows.  Such assured cash-in-flow, can happen only when company is enjoying strong competitive advantage.  It is this competitive advantage that makes blue chip stocks so like-able by all investors.


Value investors do not buy blue chip stocks always.  During majority trading days, blue chip stocks trade at exorbitant price levels.  This is why value investors track its price movements closely.  They wait for prices to fall below its intrinsic value.  Buying stocks of blue chip companies at undervalued price levels ensures very good returns.


What  are Blue Chips?   Different people define it differently.  We may give definition that has worked wonderfully for us.  Idea is to formulate a theory based on this we can shortlist best stocks for long term investing.  Stock market has thousands of listed companies.  But  majority of them are below average performers.   Blue chip companies are best stocks available in market for people looking for long term holding.
Very Large Company:  This is the first essential characteristic of a blue chip company.  We can use sales turnover & EBITDA as our yard stick to screen such companies from majority.  Company which is able to aggregate high sales turnover & high EBITDA should be preferred over others.


Established Company:  This is the second essential characteristic of a blue chip company.  Established company is one which is able to maintain or grow its EBITDA over long period of time.  A company which is established enjoys strong competitive advantage.  This way they can increase their profit at fast pace.  Company which is able to grow its EBITDA fast should be preferred over others.


Strong Management:  This is the third essential characteristic of a blue chip company.  Strong management team is defined by how profitably the management is running the company.  Profitability of a company can be established by looking at its Margins.  In personally use EBITDA Margin and ROCE to screen blue chip stocks.
Shareholders’ Value:  No matter how well the company is operating, but if it is not taking care to enhance shareholders’ value, all efforts will go in vain.  Shareholder can benefit from stocks in only two ways.  One,  by market price appreciation of stock.  Second, by earning dividends.  A company which is able to grow its EPS and yield high dividends will be surely liked by all investors.


Price Valuation:  Even shares like Apple, Microsoft, Berkshire Hathaway, Exxon Mobil, TCS, RIL, is not interesting for investors if it is not priced correctly.  Looking at companies PEG ratio is a must  before buying its stocks.  Low PEG (<1) makes it a preferred choice for investors.


Blue Chip Companies & Dividend Distribution:  Blue Chip Companies has a typical characteristic of paying consistent dividends.  Value investors will note dividend/share growth-rate of last one decade.  A company will certainly qualify as a blue chip stock if it has managed to pay consistently high dividends for last 10 years.  Investors whose primary focus is income generation will buy blue chip stocks.  Long term capital appreciation of blue chip stocks may not be high, but in short term it yields high dividends.  Dividend is more comforting than hypothetical capital appreciation.  Consistent dividend generating characteristic of blue chip stocks makes it very special.
Blue Chip Companies & EPS:   Companies which has managed to pay dividends, even in bad times, are considered great by investors.  People must look into the profit and loss accounts (P & L a/c.) of dividend paying companies.  In P&L a/c. We should check the historic Earning Per Share (EPS).  Net  Profit of company  (PAT) divided by total shares outstanding in market is equal to EPS.  A positive EPS figures declared in P&L a/c confirms that the company is really making profits.  But when one checks the history of EPS (last five years) the real fact can be negative EPS growth.  So, while developing a list of blue chip companies in India, one should not only look at dividend disbursement patterns but also check EPS growth.  We do not want to buy stocks of companies whose EPS is only decreasing.  A continuously improving EPS is what we would like to see in the profit and loos accounts of companies.


Examples of Blue Chip Companies:
 Very Large Company:  High Sales Turnover, High EBITDA & High Market Cap.
Established Company:  Fast EBITDA Growth.
Strong Management:  High EBITDA Margin & High ROCE.
Shareholders’ Value:  High EPS Growth & High Dividend Yield.
Price Valuation:  Low PEG.
Name of Companies:-  Indiabulls Housing, TCS,  Power Fin. Corpn.,  HCL Terchnologies,BPCL, Hind. Zinc, HPCL, Wipro , HDFC Bank, LIC Housing Fin., Lupin etc.

Wish You Good Luck.                                                     See You Later. 

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