Blue Chip Investing: Is It A Safer Way To Invest?

Some investors may view blue chips as a safe haven for investing. In Singapore’s context, the term “blue chips” is often used to refer to the 30 constituents of the Straits Times Index (SGX: ^STI).

There are possible reasons why blue chips are seen that way. One reason could be the familiarity that some investors may have with the company. Comfortdelgro Corporation Ltd (SGX: C52) and Capitaland Mall Trust  (SGX: C38U) are both blue chips; in Singapore, it would be hard to miss the blue taxis of the former and the numerous shopping malls of the latter.

Another reason could be the size of the company. Big companies may portray an image of safety which smaller operators do not. Telecommunications firm Singapore Telecommunications Limited (SGX: Z74), for instance, has a market cap approaching S$60 billion. In some investors’ minds, Singtel’s mammoth size could mean that it is here to stay.

But here’s the thing about blue chips: Size and familiarity may not be enough to result in a winning stock.

A mixed bag

Take SembCorp Marine Ltd  (SGX: S51) for example. At its current market cap of close to $5 billion, the oil and gas outfit’s size may portray an image of safety. SembCorp Marine’s sizeable revenue and net income – the numbers came in at S$5.7 billion and S$521 million, respectively, over the past twelve months – would also help add to the image.

But, size was not enough for SembCorp Marine.

The offshore marine engineer’s stock price has cratered by 38% over the past twelve months partly due to an 8% decline in its earnings per share (EPS) over the same period. Other issues that may have pressured SembCorp Marine’s stock price include concerns over the oil price crash as well as an order backlog that has dwindled.

A Fool’s take

There is some merit in starting off with bigger, established companies.

But, investing in blue chips for the sake of safety may turn out to be a mirage. As it is with any investment, we may want to dig further into the company’s competitive position and its financial results.

Ultimately, what drives a blue chip’s stock price up over the long term is the company’s ability to to churn out better revenue and earnings that’s befitting of its established position.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.