What is a Blue Chip Stock?



Blue chip stocks are large companies that dominate the industry they are in. These are household names that are in virtually every mutual fund and portfolio. International Business Machines (IBM) has the nickname “Big Blue” since it used to be one of the biggest and most owned company in the world.

Most blue chip stocks have been around for many, many years. These are companies like Coca-Cola, Home Depot, General Electric, Exxon, and Microsoft that have been through many business cycles and used each downturn to take business away from rivals and come out a stronger, larger company. They tend to have thousands of employees and be in several different markets.

Probably the most famous list of blue chip companies is the Dow Jones Industrial Average, or DJIA, which contains the largest and most influential industrial companies. The idea behind the DJIA is that where the DJIA goes, so goes the economy since the most important companies in the economy are in the DJIA. There are also blue chip companies in the Dow Jones Transportation Index and the Dow Jones Utilities Index. Dow theory says that if the Transports and the Industrials are either rising (in an uptrend) or falling (in a downtrend), then it is a true trend. If they are mixed – one going up while the other goes down – then it is not a true trend.

The easiest way to spot a blue chip is just to look for the dominant companies that you know. Blue chip stocks are the companies like McDonald’s that a school child would choose in a stock picking game because they have been heavily advertised to by them and they know their products well. Most blue chip companies are also probably companies you’ve grown up with, although the internet has caused some blue chips to be developed very rapidly. For example, Amazon did not exist before 1994, yet by 2000 it was a household name and was dominating the selling of virtually everything. Google is another example that grew very big very fast.

Blue chip companies are sometimes good choices for growth – some large companies do very well over certain periods of time, but generally they are purchased more for stability than for growth. Many also pay good dividends, and grow their dividends regularly, so they are a good way to generate the income needed once you begin using your portfolio to pay for current expenses. The reason they are not as good for growth as small companies is that they are already so large that it is difficult for them to do things like double profits, which is what is needed to double their share price.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

BJ’s Restaurants (BJRI) Takes a Jump


BJ’s Restaurants, Inc. (BJRI) took a jump Friday as earnings came in better than expected.  The shares were up more than $4 per share, to almost $35 per share.  This is nice to see because I have quite a few shares of BJ’s scattered between my regular and retirement accounts.  I have also been planning to write covered calls on some of the shares, but the price has been too low.  I may take advantage fo this jump to write some calls on Monday.  I could probably sell the August $35s for $0.80 per option, or $800 for 1000 shares.  That would be a return of $800/$35,000 = 2.3% for the month, or about a 27% annualized return.  Then again, I may just sit pat since I usually find I do better if I stay long than if I write covered calls.

BJ’s is one of my longterm, core holdings, despite it not getting very much love until Friday.  Even after the jump, one columnist on Motley Fool didn’t think much of the move.  The reason that I like BJ’s is that they have a great business that has been successful at increasing earnings, plus they have room to expand.  I therefore plan to hold it both in good times when all of the newspapers and investing sites are recommending it and during the down times when everyone is panning it.  I don’t know when it may make a big jump like it did Friday, so trying to jump in and out of the stock would be very risky.

During down times I accumulate more shares.  I have faith in the business, so when the shares drop and become inexpensive, I buy more.  I may sell a few shares, or write covered calls on some of the shares I hold, if the price shoots up to the point where it is expensive relative to expected earnings.  I still keep a core position, however.

So would I ever sell?  I follow the annual reports and watch the commentaries in Value Line Investment Survey, which come out about every three months for BJ’s.  I don’t worry about short-term impacts like dips in the economy or small missteps.  I see what management and Value Line thinks of the longterm prospects.  As long as it looks like the company will continue to grow, I’ll hold on.  If it looks like they have grown about as much as they will, or if it looks like a new management team is changing the fundamentals of how the company is run, I’ll probably sell out.  Otherwise, I’ll stay in, taking out money here and there.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Auto Parts Industry Looking Up


Sometimes I get an issue of Value Line and one of the industrial sectors strikes me because there are a lot of companies in that industry that have high Timeliness ratings.  (For those who don’t know, Value Line is a company that provides stock research, including the Value Line Investment Survey, which is an invaluable tool for stock picking.  Timeliness is a proprietary rating system, where the 100 companies they expect to do the best in the next year are given a 1 for Timeliness.)  I like to get the paper version of Value Line, rather than just screen stocks with the online version, because it allows me to see trends like this, as well as flip through pages and look for stocks that have prices that follow a certain pattern — they increase in price in a steady fashion.

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An industry that struck me this month is the auto parts industry. There were several companies in that sector with promising Timeliness rankings, including American Axle and Manufacturing, Delphi Automotive PLC, Goodyear Tire, Standard Motor Products, and TRW Automotive.  (I once had a friend who worked for TRW.  I wonder where he is now….)  The fact that so many have good rankings says that the industry is hot at the moment and might be a good place from which to select stocks.

Looking through the individual pages, one interesting pick is Allison Transmission.  This stock does not have a Timeliness rank because it is too new.  It also does not have enough of a price history to see if it has the nice, steady incline that I look for in a stock.  Still, Value Line is projecting total returns of between 6 and 18% per year over the next 3-5 years.  Those projections are not certain and the stock carries some risk of being a loser.  Still, it might be worth putting some money into Allison Transmission since it would mean a chance of getting into a newer stock that went public just a year ago.  The 1.6% dividend is also attractive.

Borgwarner Inc. also has in interesting stock price pattern.  It has grown relatively consistently since 2003, with a break in the 2008-2009 bear market.  Earnings projections are 14%, which is respectable, and it had a 2-for-1 split about a year ago, which usually happens to stocks that are doing well.  Timeliness on Borgwarner is only a 2, however, and the projected return is only predicted to be between 3 and 12%.  This means the stock may have already seen most of the gains it will for a while and need some time to cool down.

China Automotive has a Timeliness of 1, but its price pattern is all over the board.  This might be a good stock if you are looking for something to buy and sell within a few months or a year.  I tend to look for long-term buys, however, since I find it is easier to find stocks that will grow for years than predict when a volatile stock will go up and know then when to sell.  The company also has a Safety of 4 (5 is the worst and 1 is the best) and earning’s predictability of 50%, so this would be a speculative stock with a very uncertain return at best.

The main point of this post isn’t to give specific stock suggestions, although the one’s I’ve given might be a good place to start for your research.  It is more to show the things I look at and how I evaluate a stock for purchase.  I may in fact buy some shares of Allison Transmissions, but it won’t be one of my main positions because of the uncertain nature.  I like the ability to get into things “near the ground floor,” however.  But this does not always work out.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Where to Invest $5,000. Some Great Stocks Under $50 per Share


Scanning through Value Line today, I didn’t find any stocks that just made me want to rush out and buy, but I did find some interesting picks.  Some stocks are pricey ($75 and up), meaning it would take at least $7500 to buy 100 shares, which is about the point where you get a reasonable percentage for the commission.  Here are some of the stocks I found and why I found them attractive:

Apartment Investment and Management Company (AIV):   Apartment Investment and Management Company, aka Aimco, is an REIT that invests in apartment buildings.  They currently own 265 apartment buildings, which includes 67,977 apartments.  If you bought into this REIT, you could become a landlord without getting calls in the middle of the night to fix the heater.  The REIT doesn’t offer a lot of appreciation potential, meaning that the price will probably stay fairly stable and isn’t expected to increase much, but it currently has a 3.5% payout to owners.  If held for a long time, it is likely they would increase their payout, resulting in both an increase in the percentage an investor would get for the initial investment and a move up in price.  This would be a good investment for an income account such as for a retiree who wanted current income, or maybe an educational IRA with only a few more years before the money will be needed.

Dow Chemical (DOW):  Dow offers both price appreciation potential and a nice, 3% dividend. Value Line sees possible earnings increases of over 14% over the next five years, which in turn will provide price increases in the 7-12% range.  The dividend is also expected to increase by about 10% per year, which will help move the price upwards.  This is a more risky play than the Aimco since the is has traditionally been difficult to predict the company’s earnings.  While Dow is a strong company that can weather some bad times, the stock might decline a bit if earnings disappoint.

BJ’s Restaurants (BJRI):  As a disclaimer, I own several shares of BJ’s and have for a few years.  Still, there is a reason I own so many shares – I think the company has a lot of long-term growth potential.  The microbrew beer and gourmet pizza chain has some very popular and profitable restaurants out west, but they have yet to really enter the eastern market.  I expect them to meet up with Old Chicago Pizza somewhere in the midwest, at which point there’ll be a brawl for domination.  I like that they have a very successful concept and that they have a lot of room to expand.  As regular blog readers will know, I’m looking for stocks that I can buy and forget about for several years while they grow and grow.

Value Line doesn’t expect them to perform much better than the market over the next year – they have a Timeliness Ranking of 3, which is average for the market.  Still, they have a prediction of 16% annualized earnings growth over the next five years and an annualized rate of return of between 22 and 35% because the shares are so depressed in price.  This is a stock that will require patience, however, since it may sit for a while before the spark finally catches and it goes up in price.

Pier One Imports (PIR):  This stock has had disappointing numbers lately.  The reason offered by management is that the snow (where is all of this global warming when you need it?) kept a lot of shoppers home during critical weekends.  Value Line has therefore trimmed their earnings estimates.  Still, they are expecting 13% earnings growth annualized over the next five years and, more exultingly, 36% annualized dividend growth over the same period.  With a 25% Return on Equity, the company must be doing something right.  Again, this may be a stock that doesn’t do much for a while, but you can be collecting the 1.2% dividend while you wait.  If the dividends do grow as expected, you’ll see the price move up accordingly.  Annualized returns of 7-20% are expected here.  Once again, I hold an interest in this company.

Greenbrier (GBX):  Another company I’ve been looking to acquire an interest in is Greenbrier Companies, Incorporated.  This is a company that designs, makes, and repairs railroad freight cars.  Railroad is booming right now – they are the third timeliest industry group in the Value Line universe of stocks.  The energy boom is causing all sorts of oil shipments, and Greenbrier is supplying the cars for moving that black gold down from the drilling fields to the refineries.  This is not a great long-term play – 3-5 year price appreciation potential is relatively flat and they don’t pay a dividend.  The stock has been going up recently, however, and it may well continue to do so for a while.  For those who are momentum investors, it might be worth taking a ride on this train.  Just be ready to jump off – this isn’t something you want to hold once the momentum turns the other way.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Panick!


In Hitchhiker’s Guide to the Galaxy, each celestial hitchhiker would carry a guide with him or her.  Emblazoned on the cover of that book were the words, “Don’t Panic.”  Perhaps investors who have been watching the market fall over the last couple of days should take the same advice.

It is actually at times such as this a good idea to just sit pat and relax.  In fact, it is after the large market drops that there is a potential to make the biggest gains.  One could have made a huge return on stocks from 2009 until 2013.  Likewise, there were huge gains to be made from 2003-2005, 1992-1996, and 1980-1984.  Buying in after the stock market crash of the 1930’s would have been a great idea, as would buying after the crash in 1987.  Many times stocks will recover to their previous highs within a year or two after a downturn,

Unfortunately, most investors do just the opposite.  When stocks go up, they rush in to buy.  When they go down, they sell in a panic.  In fact, there are people who look at what retail investors are doing and sell when they start to buy stocks and buy when they start to sell.

This doesn’t mean, however, that you should make a huge purchase of a stock just because it has declined a few points.  Just because stocks have gone down a little doesn’t mean that they won’t go lower.  The act of trying to buy a stock as it declines in value is called “trying to catch a falling knife.”  Many people who try this trick soon find that just because a stock seems cheap compared to where it was recently doesn’t mean that it can’t go lower.  Sometimes stocks were way overvalued and have quite a way to fall before being reasonably valued again.  Sometimes they also become very undervalued and stay that way for longer than you would think.

The best thing to do if you have some cash on the sidelines is to buy in slowly.  Make a small purchase, wait a few days or a few weeks, and then buy a little more.  Do this each time there is another decline.  While you may not buy shares at the lowest possible price, at least you’ll be paying less than you would have a few days ago.  By purchasing in installments you won’t have the psychological effect of taking a loss and starting to wonder if you made a mistake in buying the shares.  Many people who see a stock continue to fall panick and sell out right before the stock was about to rebound.  If you keep some cash on the sideline, you will be hoping for the shares to go lower since that means you can buy some shares at a lower price.

It is also a great time to save up some cash from your job and buy some additional shares as you can.  Perhaps also put some money into your IRA for next year (or put some money into your IRA for this year if you haven’t already.

Just remember to not panick. If you find yourself worried, there is nothing wrong with just ignoring the market for a few weeks.  Things will be just fine.

To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Long Term Price Trend Can Indicate a Winning Stock


When choosing a stock to buy, the long term price trend is a good place to start.  This is because companies that are well run and grow earnings year after year will likewise have stock prices that continually grow.  Remember that we are looking to find stocks that will grow reliably over the next several years.  Ideally we would want to buy a stock that doubles reliably every few years or so.  We aren’t interested necessarily in something that will shoot up right now, but a stock in a company that will faithfully grow, and this growth will be reflected in the stock price sooner or later.  Note that the “sooner or later” qualification is due to the fact that the price the market is willing to give for a stock at any one time is fickle and can be much higher or lower than the perceived “fair value.”  These fluctuations, however, will tend to be centered around the fair price, so if the fair price of the stock is growing over time, because the company is growing as are profits, then the market price will also tend to follow this trend over the long-term.

The first thing I tend to look at, which is an obvious but an often over-looked trait, is the price of the stock itself.  As said above, the market price will tend to follow the fair value, just as a paper boat floating downstream in a turbulent river will tend to move at the average velocity of the stream, although there may be many changes in velocity if observed for only a short period of time.  If a company is increasing share holder value, making the company’s stock more valuable, this will be reflected in the price of the stock eventually.

When looking for candidates, I will flip though several stocks looking at the 5-10 year price history (High-Low-Open-Close charts or candlesticks, preferably) and look for those that I could set a ruler on and draw a relatively flat line.  This can be done in a chart book (Dailygraphs, for example), in a publication like Valueline, or, less easily, on the web at Yahoo or another site.  The issue with doing this online is that you often need to provide the symbol for the company, so you can’t easily flip through a set of price graphs, and you obviously won’t look at the charts of companies of which you have not heard.

Also, I try to avoid companies that are increasing very rapidly in price.  While these companies are the lifeblood of the momentum investor, which is also a perfectly valid investment method, these companies tend to fizzle out and fall back down to earth, producing a bell-shaped curve (see Krispy Kreme for an example).  In a later post I’ll go into the two main investment philosophies, momentum and value, and provide some tricks for those wanting to do momentum investing.

An example of a company with this type of price trend is Aflac (AFL).  While there are some deviations, over the period growth is relatively steady, so the people running the company obviously know how to grow the business.  As long as they don’t change what they do, and the business climate is such that what they have done will continue to work, and the company has not grown as big as it can following that business model, then I would expect this trend to continue.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Things to Look For When Picking Stocks


Stock picking is definitely an art and not a science.  Just as you can’t become a violin virtuoso by studying violin playing in a book, you can’t become an expert stock picker by reading financial books or developing a set of screens.  It is part natural ability and part experience.  Still, there are certain traits that I look for when picking stocks.

I only look for long-term buys because it is easier to predict which companies will do best over long periods of time.  Your guess is as good as mine when it comes to picking a stock for the next week or the next month.  There are a lot of random factors that influence stock prices in the near-term.  There is also probably some manipulation involved.  You can push stock prices one way or another for a short period of time, but not for months or years.  Only great, well-run companies will increase in price over years or decades.

When buying a stock I approach it as I would if I were buying a business with a set of managers in place.  I want to find a company that is profitable and well-run.  I want the company to have a good product that people need and that is unlikely to be replaced in the near-term.  I also want there to be room for growth since most of my profit will come from stock appreciation.  The stock price may not reflect the fundamentals of the company immediately – I’ve seen stocks fall ten or fifteen percent despite the earnings hitting record highs.  Over long periods of time, however, companies that are growing and making more money will see their stock prices rise.

Here are specific factors I consider:

1.  The price history:  One of the best indicators of a well run, profitable company is a steady increase in price.  I love stock charts where you can lay a ruler across the price history and the price follows the ruler upwards at a steady rate.  See, for example, the chart for Church and Dwight.  Obviously if the price has been increasing for a long time, the company must have been doing well.  I try to avoid stocks that are increasing in price extremely rapidly since these are normally fads and bubble stocks that crash down just as fast.

2.  Earnings growth rate:  A company that is increasing earnings quarter after quarter will increase in value over time.  I like to see companies that increase earnings for several years at a healthy but sustainable rate.  This is somewhere between 10 and 20% per year.  Note that some companies increase earnings by expanding their business, others increase them by repurchasing shares, and some increase the amount they make at all locations or per employee.  Of the three, increasing earnings at all locations is the best, increasing them through expansion is good, and buybacks of shares is the least exciting.

3.  Little of no debt:  Just as people who manage their finances well have little or no debt, a company that manages its finances well will have little debt.  The best companies are those that can grow organically, meaning that they make enough from operations to pay for development and expansion; however, some businesses, such as the banking industry, inherently use more debt than others.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.