Blue Chip Stocks in The Philippines: Are They Good Investments?
The term “blue chip stocks” is common in the Philippine stock market investing industry. Many investors (newbies and experiences ones alike) tend to embrace the strategy of investing in blue chip stocks. But is this a good strategy? Will investing in these kinds of stocks make you rich? We’ll find out in this article.
What Is A Blue Chip Stock?
A ‘blue chip’ is any publicly traded company that’s already well established in terms of market cap, annual revenue, financial position, assets and earning power.
Without getting into deep financial theories, a blue chip is simply a stock available in the market which is issued by a well-established, ‘household’ name company.
Why Do People Invest In Philippine Blue Chip Stocks?
Many believe that investing in these big, established, and popular companies would be safer.
And although these stocks may go down in the short term, there are people who swear by these blue chips, confident that they will always go up in value over time.
Here are some of the reasons why people embrace blue chip stocks and want to hold on to them forever:
- Pop Culture Appeal. Stocks like Jollibee, SMDC, Globe, and ABS-CBN, are all part of the daily life of Filipinos. Because of brand recognition, people tend to just buy them based on popularity. People seem to think that, because these companies are owned by rich and successful business tycoons, buying shares from them will guarantee investment profits. (Dangerous mindset in my opinion).
- They Are Actually Easier To Buy And Sell. Supply and demand for blue chip stocks are very high. You can initiate a sell order this minute and easily get matched to an eager buyer in the market almost instantly through your online broker. This is because blue chips tend to become traded in large volumes everyday. As a result, people think that investing in these stocks are better in terms of liquidity (ability to convert assets into cash).
- They Tend To React Better To Booming Economies. When the Philippine economy is booming, blue chip stocks are the first ones to reflect this. That’s why stockholders of these companies generally have a big smile on their face when the market is bullish. The truth is, blue chips actually lead the charge when it comes to stock market increases. However, this is a two-sided street. When the market goes down and the economy gets sour, the blue chips are the first ones to react as well!
- Dividend payers. No further discussion here. Most blue chip stocks usually pay higher dividends than other stocks. However, you usually need to shell out more money to invest in this case.
What Are The Disadvantages of Investing In Blue Chip Philippine Stocks?
We’ve talked about the good stuff. Now let’s delve into the bad ones:
- First of all, blue chips tend the suffer the most decline during bear markets. I remember in the so-called ‘ghost month’ of 2013, the SM stock fell as much as 200-300 points in a single day, and the whole PSEI followed suit! And because my portfolio consisted of mainly blue chip stocks during that time, you can imagine the kind of losses I incurred. A true nightmare.
- You can get ‘whipsawed’ more often if you trade blue chips for the short to medium term. The term ‘whipsaw’ means the stock starts to decline as soon as you buy them, and then start to go up in value as soon as you sell them. It is very frustrating for a trader when this kind of thing happens to them. Tell you what, investors who trade blue chips tend to get whipsawed a lot, mainly because the popular companies are traded in unbelievably huge volumes. Thus, they are more prone to market speculation.
- Blue chip stocks are usually overvalued and pricey. This is one of the major reasons why I personally do not invest much in blue chip stocks, or only when I have to! It’s because most of them sell at a very high price compared to their earnings. Some companies in the PSEI (the list of the 30 most popular stocks in the Philippine Stock Exchange) sell at a multiple of 30x, 40x, 50x their annual earnings. Outrageous!
Think of it this way:
Would you buy a lemonade stand that’s earning a net income of PHP 50,000 a year, at a price of Php 1 million pesos? (that’s a multiple of 20).
Personally, I would have doubts about doing that purchase! Because it would take me 20 freakin’ years to break even on my investment.
As ironic as it sounds, many investors in the Philippine stock exchange buy lemonade stands for 5+ million. I mean it. (this is just an analogy, ok? You get the point).
Is It Wise To Invest in Philippine Blue Chip Stocks?
The answer is, it depends. As I’ve mentioned above, there are pros and cons to investing in them.
BUT, (and this is a big but)….
Don’t make the mistake of investing in blue chip stocks just because they are popular and are well-recognized brands in the Philippines.
In fact, when you invest, don’t categorize stocks as blue chips and non-blue chips. Because that’s not going to be the indicator of your success when investing in stocks.
Here’s What To Do Instead
Look at the underlying value of the stocks (businesses) that you want to buy. Learn how to read basic financial ratios and statements. These data are all available online, you just have to find them and know what to look for.
If a company is well known and popular in the Philippines, do your research and see if the financial reports of the company coincide with its reputation. If the numbers are good, then go ahead and make a final opinion about it and decide accordingly (whether you will buy or not).
Remember, Warren Buffett refused to invest in a certain blue chip stock for DECADES. The name of that stock is APPLE. Just recently, Warren Buffett bought a a huge amount of shares from APPLE and is now one of the major shareholders.
You know why? Because Buffett waited for the right circumstances. He waited for Apple to become a favorable purchase according to his investment criteria. In short, he didn’t let the popularity of the stock cloud his judgement and opinion. He let the numbers speak for themselves before making the purchase.