*Disclaimer: All stocks mentioned in this article is not and shall not be construed as investment recommendation to buy, hold or sell. They are mentioned merely to illustrate a point on misconception surrounding investing in bluechip stocks in general.
You just need to invest in Bluechip stocks and you will do good in the long run
We hear this tip a lot among retail investors.
In our opinion, it is unwise to invest using this tip blindly. Here’s why:
Definition of a Bluechip Stock is Vague
The term Blue Chip originates from the game of poker. In the game, blue coins (chips) have the highest value compared to red and white ones:
People often categorise Bluechip stocks as those which:
Have big market capitalization
Have a large volume (widely traded)
Have a strong brand power
Have a “solid” fundamentals
As we can see, the criteria above are vague as there are no definite / quantitative measures.
It does not take into account these important factors when investing in stocks:
Business outlook
Is the business expected to grow in the coming years? Has the business shown convincing signs of recovery if they have recently been going through rough patches of time.
Competition
What is the moat of the business? Is its market dominance easily eroded by new entrants?Valuation
Is the business still valued at a premium? Or has it been valued at an incredible bargain? You can measure valuation using popular valuation tools such as Price to Earnings ratio or Price to Book Value, and others.Management
Behind a great business is always great people. Are you confident of the prudence of the management in ensuring its business’ durability in time to come? Do they do a crazy amount of transfer pricing? Do they honor their minority shareholders by giving out dividends consistently?
Examples
Here are some examples of past Bluechip stocks which do not do well in terms of price action in recent times, and it becomes dangerous for someone who blindly invest regularly without paying any attention to the important aspects explained above.
*Disclaimer: The sole purpose of this list is to illustrate the danger of blindly buying a stock regularly without paying much attention to the fundamentals and valuation. It does NOT mean that we do not like the stocks or their products. We may even consider buying their stocks if their business starts recovering and their valuations are cheap.
Sidomuncul (SIDO)
All Indonesians know their product or at least the smart ones do :) Yes they produce the hugely popular herbal medicine Tolak Angin.
In recent times, their price is down 52.51% from its 2022 peak.
Unilever (UNVR)
Indonesians who brush their teeth, are also likely to use their products that is Pepsodent. We still vividly remember the argument to purchase this stock when we first started investing back in 2017:
If there is a crisis, do you think we will stop brushing our teeth? That’s why you should invest in evergreen stocks like Unilever.
- anonymous broker
Well the price is now down 68.51% from its 2018 peak. So if we just payed attention to his advice, we would be suffering quite a bit of losses.
Gudang Garam (GGRM)
Their banners are everywhere and their smokers are diehard and super loyal. Perhaps you have heard of the slogan: Pria Punya Selera. That is Gudang Garam. The stock was also frequently championed by brokers in 2017 all the way to 2019.
This tier 1 cigarette producer is now down 75.04% from its 2019 peak.
Bumi Resources (BUMI)
We are not joking, BUMI was once considered as a Bluechip stock during the 2008 era. The stock even entered the premier Indonesian index LQ45.
This is not surprising because it is actually one of the largest, if not the largest, coal mining company in Indonesia.
Waskita Karya (WSKT)
One of the largest state owned construction companies responsible for many infrastructure projects. We still remember clearly in 2018 when many of the top brokers recommended this stock for its “lucrative” projects assigned by the government. They call these projects angin segar 🌬️🌬️.
We also still remembered them saying:
Jangan khawatir Pak, ini perusahaan sangat besar, ga mungkin kenapa-kenapa.
- anonymous broker
Its price is now down by 92% from its 2018 peak. If you are holding this stock as of November 2023, you can’t sell it because the stock is suspended.
Multiple Type of Market Players that Buy, Sell, Hold Bluechip Stocks
In the stock market, there are various kinds of market participants. We have:
Retail investors like you and me
Fund managers of pension funds
Fund managers of insurance funds
Foreign fund managers (usually top index like FTSE or MSCI)
and many other types of fund managers
As you can see, these fund managers have funds that is likely to be more than your and our money combined. These fund managers also tend to invest huge money into bluechip stocks because bluechip stocks usually have higher liquidity.
Fund managers also have a variety of investing framework that are non-standard (alien to retails like you and me).
For example, a fund is overweight on one stock, they might be required to sell the stock so that they will be able to track the IHSG index more closely, vice versa.
Another example, if a company’s free float market capitalisation is not high enough, it might be excluded from their fund portfolio and we will get a huge sell pressure from these fund managers.
Consequently if these big whales enter in and out of the bluechip stocks’ position for multiple reasons, we will see a higher volatility as demonstrated in the stocks that have been highlighted above. Higher volatility usually entail higher risk.
The Takeaway
So Mr. Budi, we should avoid bluechip stocks then?
Absolutely not. We are not saying that all bluechip stocks mentioned above are bad companies. We are also not saying that we should avoid bluechip stocks at all cost.
What we are saying is that we should not invest in stocks just because they are bluechip stocks. Size does not always translate to safety. If you are only paying attention to sentiments but not facts and figures, it could turn out bad for you over a longer period of time.
Just because a stock is categorised as bluechip does not mean that it is a “safe” investment over the long run.