How to identify top bluechip stocks for long term investment?
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.
Also Read: Do not know how to calculate yield of bond, stock and fixed deposit, check here
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 ₹ 1 of investment by shareholders, there should not be more than ₹ 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 ₹ 10 Crores and liability of ₹ 20 Crores (Ratio is 2). On the other hand Company-2 has shareholders' equity of ₹ 5 Crore and ₹ 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 ₹ 100 on a shareholders' equity of ₹ 500, RoE works out to be ₹ 100 / ₹ 500 x 100 = ₹ 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 ₹ 100 and it has to pay ₹ 20 every year as interest expenses, the ratio would be ₹ 100 / ₹ 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 > ₹ 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 ₹ 900 per share and total shares of the company are 1,000, market capitalization would be ₹ 900 x ₹ 1,000 = ₹ 900,000. Any company where the market capitalization of > ₹ 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 ₹ 42,400 Crores and Ajanta Pharma Market cap is ₹ 3,326. Both can be considered as best blue chip stocks in this category.
Also Read: Are you making these mistakes while identifying penny stocks in India?
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.)
Also Read: How beta value of the share can help you to take wise investment decision?
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.
If you enjoyed this article, share it with your friends and colleagues on Facebook and Twitter.
Suresh
How to identify top bluechip stocks for long term investment
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how to identifiy the mid cap and small cap for long investment
Nice Article Suresh KP.. May you guide me any website or software which have these factors listing out?. I see most of websites don’t have all these at one place. How you managed to collate information?
I know. We can refer valueresearch online or moneycontrol.com for such kind of info.
Sir, Looking for good companies for long term sip in equity / mutual funds today’s date. Please tell me about Franklin mutual fund, Fedility fund etc . Thks
Please provide best mutual fund to invest today by SIP.
Sir,
I am planning to invest in some blue chip stocks on long term basis, could you please suggest some picks from the above list based on current market prices? How is your opinion on ICICI, Sun Pharma, ITC, Godrej, IOCL and TCS?
Also I would like some suggestions on good pharma funds to invest in, currently I have a SIP of 10K (50/50) in ICCI Pru focussed blue chip fund and Birla Sunlife Front Line Equity fund.
Would like to add some good funds for another 10K.
Kindest Regards,
Nishar, Generally, I would not advice for stock recos. Regd MF, you can invest in reliance pharma or UTI pharma fund. Invest in large cap segment like BNP Equity fund or URI Equity fund and multi cap funds like Reliance Equity Opps fund etc.,
I think we also go by 52 weeks high and 52 weeks low value of shares in One year time. Purchase when it is lowest during last one and one half years. See the average low in last 4/5 years also. And wait for one years, it will definitely give some return from Blue Chip Companies Shares.
can u share your email id so that we can get in touch further also. it seems really very nice article.
I was tracking the scrips recommeded by you in April 14. In one year (today), the average gain is 39 %. Only Ipca Lab has given a negative yied of 19 %. All others have given a positive yied.
coalindia 28%
EICHERMOT 135%
GSPL 75%
HCLtech 26%
IPCAlab -19%
ITC 0%
M&M 19%
Marico 88%
TCS 12%
Titan 49%
TTKPRESTIG 21%
Scrip Reco Price Curr. Mkt. 52 w Hi 52 w Low Gain From Hi% From Lo %
coalindia 293 376 424 289 28% 11% 30%
EICHERMOT 6120 14389 17200 5968 135% 16% 141%
GSPL 70 123 136 70 75% 10% 75%
HCLtech 700 879 2117 835 26% 58% 5%
IPCAlab 812 657 899 592 -19% 27% 11%
ITC 344 343 410 312 0% 16% 10%
M&M 1002 1196 1434 1021 19% 17% 17%
Marico 212 399 428 200 88% 7% 100%
TCS 2164 2431 2834 2001 12% 14% 22%
Titan 263 392 448 252 49% 13% 56%
TTKPRESTIG 3055 3695 4832 2950 21% 24% 25%
Thanks Arul.
In 3) Average ROE, the example you have given Rs 100 on an Equity of Rs 500 works out to 20% and not 25% AND NEVER Rs 20%. Please correct the mistake asap.
Same with TCS market capitalization 42,400 Crores not 424,00 crores.
Other than that a decent article.
I have been investing for the last 40 years directly into long term stocks and are very comfortable in my retirement. I have little or no Mutual funds not Fixed deposits.
Thanks. I have corrected this error. This appeared at one place and every other place i referred as 20% only. TCS coma error also I have corrected.
Our query to you following the good article is that you have asked to screen to identify the Blue Chips, can you suggest and recommend the websites where one can screen to arrive at the list of such stocks? Kindly revert, thanks.
There are several sites like ICICIdirect, Edelweiss, sharekhan etc.,
Excellent analysis
Would you consider NMDC to be blue chip?
Is it a good option for long term investment?
Nice article.
Hi Suresh,
Thanks for the recommendations.
I am planning to invest in some blue chip stocks (ITC, Nestle, SBI, ICICI, IDFC, Cairn India, TCS…) for long term (8-10 yrs) through the monthly SIP mode to avoid the market timing mistakes.
Will this approch give a decent result (around 14-15%) ?
Thanks, Tridip
Hi Suresh,
Very useful article. Please advice me how to invest Rs.10000 in market now. Which share I should purchase to get good return for long term
Hi Sandeep, I would not provide stock specific advice currently.
Hi Suresh,
Any new list of blue chip stocks ?
And from where you got above data for analysis ?
Sandeep Yeole
WIP, will publish soon
Hi Suresh,
While searching on net I got good site screener .in
This will help to build our query in any ration and we can create the our own ratio.
Please have a look on this
With Regards,
Sandeep Yeole
Good to hear this Sandeep. Thanks for sharing. I would go thru when I am free.
Hi Suresh,
I have identified below stock as per parameters given by you. Requesting you to have a look and help us.
Name CMPRs. Int Coverage Debt / Eq Mar CapRs.Cr. ROE 5Yr% PEG P/E
1 Apollo Tyres Ltd. 203.75 5.99 0.22 10372.91 23.24 0.18 9.57
2 Coal India Ltd. 341.35 448.31 0 215608.95 37.62 0.49 14.01
3 Indraprastha Gas Ltd. 419.55 15.29 0.18 5873.7 25.92 0.94 15.19
4 MphasiS Ltd. 429.1 28.35 0.1 9017.11 26.05 0.62 13.38
5 Gujarat Gas Company Ltd. 496.8 1095.29 0 6371.46 29.75 1.38 17.9
6 Amara Raja Batteries Ltd. 596.45 787.43 0.06 10187.37 29.97 1.02 26.85
7 Wipro Ltd. 596.8 33.75 0.16 147230.56 25.36 1.25 17.79
8 Supreme Industries Ltd. 652.75 6.44 0.37 8293.19 36.52 1.3 29.26
9 Glenmark Pharmaceuticals Ltd. 721.8 6.14 1.1 19575.22 23.4 0.95 23.99
10 Balkrishna Industries Ltd. 774.75 24.69 1.24 7487.96 29.16 0.43 14.94
11 Ipca Laboratories Ltd. 791.95 33.39 0.22 9994.41 25.77 0.77 17.44
12 Wockhardt Ltd. 798.95 7.27 0.4 8788.45 62.74 1.33 17.92
13 Sun Pharmaceutical Industries Ltd. 857.25 258.33 0.13 177553.62 20.87 1.07 30.24
14 Torrent Pharmaceuticals Ltd. 871.45 14.41 0.5 14814.65 32.86 0.83 19.21
15 Aurobindo Pharma Ltd. 968.25 21.82 0.97 28224.49 22.27 0.63 17.64
16 Godrej Consumer Products Ltd. 988.6 10.8 0.45 33651.94 29.09 1.2 42.96
17 Bajaj Finserv Ltd. 1129.65 2.74 1.66 17974.99 24.45 0.11 11.34
18 Mahindra & Mahindra Ltd. 1360.8 2.86 1.21 80330.75 23.28 1.11 20.05
19 Symphony Ltd. 1378.35 4543 0 4824.23 42.77 1.42 48.46
20 Atul Ltd. 1389.6 10.82 0.32 4121.55 21.21 0.86 17.8
21 Britannia Industries Ltd. 1392.05 119.73 0.19 16697.64 50.19 1.36 39.8
22 Lupin Ltd. 1395.65 137.26 0.08 62601.88 29.01 1.06 30.39
23 Ajanta Pharma Ltd. 1725.2 44.73 0.21 6100.31 34.45 0.44 24.69
24 CMC Ltd. 2223.1 5566.14 0 6735.99 26.92 0.93 22.12
25 Bajaj Auto Ltd. 2351.6 9156.51 0.01 68048.25 52.84 0.65 20.97
26 Solar Industries India Ltd. 2397.8 11.34 0.67 4340.02 23.56 1.46 29.94
27 Bayer Cropscience Ltd. 2412.1 96.65 0 8828.29 41.35 1.16 28.46
28 Tech Mahindra Ltd. 2489.7 59.78 0.01 58356.08 32.18 0.92 20.45
29 Tata Consultancy Services Ltd. 2736.6 669.07 0.01 536017.84 41.61 1 26.27
30 Abbott India Ltd. 3172 5587.6 0 6740.5 26.6 1.3 35.86
31 TTK Prestige Ltd. 4081.45 24.63 0.04 4750.81 37.39 1.25 45.31
32 Page Industries Ltd. 7950.65 21.51 0.49 8864.97 57.67 1.47 53.73
33 Shree Cements Ltd. 8399.8 7.93 0.25 29264.9 31.58 1.27 33.73
34 MRF Ltd. 32681.95 6.26 0.39 13857.15 24.64 0.43 18.11
Sandeep, I am not analysing stocks in that deep.
Thank you Suresh for this informative article. I invest on behalf of my father and so I tread carefully. He is 68 years old. Most of his investments are in debt but I would like to add to his portfolio direct equity and consider blue-chip companies to be the safest best. I would welcome your suggestions about five solid companies across different sectors that will give us good returns over a period of 3 to 5 years?
Best,
Deepa
Hi Deepa, Direct stock markets are high risk, hence I generally do not advice on any particular stocks. In case you have any query on non stock investment options, please let me know
Hi Suresh. Thanks for replying. I do understand that direct equity is risky and needs constant monitoring. So, would you say that equity based mutual funds are a better option? Currently, I am not looking at any more debt because a considerable part of our portfolio is debt. Hence I thought I could give an upswing to our portfolio by adding some select equity. I thought of direct equity because I feel that if the decisions are understood and one has a time horizon of three to five years, it would pay off. I am very clear about not investing in mid or small- cap stocks. What I want to achieve is an annualised return of 15 to 18 % on select large-cap stocks. To take a calculated risk.
Best,
Deepa
Hi Deepa, You can expect 15% risk provided you invest in large cap funds + consider high risk options like sector funds under banking or infra funds.
I am purchased unitech 36.50 what will i do for this stock
ITS A EYE OPENER ABOUT HOLDING VALUE STOCKS FOR LONG TERM.SIR, I AM ACCUMULATING ITC OVER 2 MONTHS IN RANGE OF 330-340. AM I DOING RIGHT OR SHOULD I WAIT FOR SOME TIME TO BUY IT?
Amit, ITC is good. However it depends on when you enter and when you intend to exit. Now markets are at peak, you can look to book some profits. You can hold for another 2-3 months before you completely exit.
Great Article Suresh,
Please advise the source from where we can find PEG Ratios for Stocks, as its difficult to quantify the future earning estimate.
Regards
Sandeep
Sandeep, Majority of the stock broking research provides this info. e.g. ICICI Direct.com, if you click on company name, it would provide all these details.
Hi Suresh,
Nice article!! I have invested in a stock market and beared a big loss so need your inputs on some points:
1. I had purchased JP associate shares (QTY:100) for 150 rs each in 2012. Current value is 54 INR per share so what should I do? Shall I hold it or purchase some more to make it average?
2. Also, I blindly invested in share of Vishal Technologies(acquired by Coral-Hub). I invested 25k@25rs each share in 2012and current value is 500.00 INR(0.30 paise per share) only.Please suggest me what to do in this case.
3. I purchased 10 shares of Punjab national bank @820 per share in 2013 and currntly its 835 per share so wht to do in this case. Please suggest.
Regards,
Rajesh
Rajesh, Bad to hear that you are incurring losses. Since you are in losses, there is no point in exiting now. Though the future does not look attractive, have patience and try to see during market peaks and come out.
Good article – a standard yardstick followed by peers and given a good company list. The concluding
suggestion to buy bluechip stock with low PEG ratio is an assertive and confident suggesion which will pay
good returns. Keep it up and write more articles for the benefit of the investors.
Thanks for the list.. Great post..
Fantastic article.
Very good article for the Fundamental analysis. Appreciate your effort in making clear for lot of new investors. Thank you.
Very useful post… thanks and look forward to hear more from you. 🙂
Thanks for the list. Nice read.