Bluechip Stocks are zooming in 2014 bull run. While one of the reasons could be that elections ahead, blue chip companies are generally worth investing for the long term. Identifying best blue chip stocks could be a winning strategy in creating wealth. But why investors are failing to get returns in the stock market? This is due to lack of knowledge on identifying good blue chip stocks. Several investors look for quick money and end-up in losses. There are several parameters to identify best and top blue chip stocks for investing for the long term. What are those parameters? Is it really that hard to identify good large cap stocks which can create wealth in the long run?
What are blue chip stocks?
If you are familiar about blue chip stocks, skip this section. Blue chip stocks or shares are largest and consistent profit earners. These are companies that earned good name and are providing stable returns to investors. However, they create value slowly over a period of time. These carry less risk compared to other stocks. However, one cannot blindly buy any blue chip stocks for investment. Buying right stocks are right, time could yield good returns in the long run.
How to identify top blue chip stocks for long term investment?
I am going to talk about a few important parameters in this article, which you can consider when identifying top blue chip stocks.
1) Consistent annualized revenue growth in last 5 years: You can filter the companies which are consistently performing in terms of revenue growth. Such revenue growth should be at least 20% annualized growth in revenue in the last 5 years. E.g. TCS EPS annualized growth in last 5years is 27% and HCL Technologies annualized EPS growth is 39%. These can be considered as some of the best blue chip stocks in this category.
2) Debt to Equity Ratio < 2: This is the ratio of company financial leverage calculated by dividing total liabilities by shareholders' equity. Means for every Rs 1 of investment by shareholders, there should not be more than Rs 2 of liabilities. The lower the ratio, the greater the chances that this company is able to manage the funds within own sources. E.g. Company-1 has shareholders' equity of Rs 10 Crores and liability of Rs 20 Crores (Ratio is 2). On the other hand Company-2 has shareholders' equity of Rs 5 Crore and Rs 15 Crores as liabilities (Ratio is 3). Compared to both these companies, Company-2 has a better debt to equity ratio as it is less than Company-1 and less than 2
3) Average ROE > 20%: You can consider stocks where the average Return on Equity (RoE) is > 20%. Return on Equity is nothing but the Net Income over the shareholders' equity. For an example, company-1 is earning Rs 100 on a shareholders' equity of Rs 500, RoE works out to be Rs 100 / Rs 500 x 100 = Rs 20%. Picking up stocks which have > 20% Return on equity is good stock as they create good earnings to the shareholders. Another example is TCS has Avg ROE in last 5 years at 42%, while Ajanta Phar ROE is 22%. Though both give ROE more than 20% and both can be considered for investment, TCS can be a best bet for the long term.
4) Interest coverage ratio >2: Interest coverage ratio is the ratio used to determine how easily a company can pay interest on the outstanding debt. Interest coverage ratio = CBIT / Interest expenses. For an example, company-1 EBIT (Earnings before income tax) is Rs 100 and it has to pay Rs 20 every year as interest expenses, the ratio would be Rs 100 / Rs 20 = 5. Means company would be able to pay interest expenses up to 5 times from its profits. Any company where the interest coverage ratio is lower than 2, the performance of such company is questionable. Such companies struggle to make the interest payment from profits and such profits would decline year on year. E.g. TCS interest coverage ratio is 374 and Adani Ports and SEZ Debt ratio is 5.28. Though both are good, TCS scores high.
5) Market capitalization > Rs 3,000 Crores: Market capitalization is the total value of company outstanding shares. It is the simple arithmetic of outstanding shares issued by the company at market value. E.g. if Reliance share value is Rs 900 per share and total shares of the company are 1,000, market capitalization would be Rs 900 x Rs 1,000 = Rs 900,000. Any company where the market capitalization of > Rs 3,000 Crores can be considered as a blue chip stock. The higher the market capitalization, the higher the confidence in such company as they would have grown over a period of time. E.g. TCS market capitalization is Rs 42,400 Crores and Ajanta Pharma Market cap is Rs 3,326. Both can be considered as best blue chip stocks in this category.
6) PEG < 1.5: Price to Earnings growth (PEG) is key ratio that is used to determine the time it would take for an investor to double the money with such stock investment.
- E.g. Company-1 has P/E ratio 20 times to its 12% earnings in next 5 years. PEG ratio would be 20 / 12 = 1.66. Company-2 has a P/E ratio of 30 times with a 40 % earnings estimate for next 5 years. PEG ratio would be 30/40 = 0.75. Now Company-1 stock price is higher than earnings growth and it does not grow faster. On the other hand, Company-2 has 0.75 PEG which is undervalued as the ratio is < 1.5 and is always good for investing now.
- Another example is TCS has a PEG ratio as 0.89 and Coal India as 0.31. Both are good, however Coal India scores high in this parameter.
Some of the top blue chip stocks which meets all these requirements are enclosed in below chart. Investors can review and consider investing for the long term. (Source: Data compiled by me visiting various websites like ICICIdirect, Valueresearchonline, moneycontrol.com etc.)
Conclusion: If you want to identify some more good stocks, take a pen and paper and start identifying best blue stocks for long term investment. Instead of timing the market, better to invest in low PEG ratio blue chip stocks which can help you to grow your money faster. Such, blue chip stocks can multiply your money in the long run of 5 to 10 years.
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How to identify top bluechip stocks for long term investment
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