Blue Chip Companies have a big market cap, good brand value, a lot of customers, provide good liquidity in stocks, provide good turnover in trading, Tracked by all Stock Research houses etc ….. All these are positive factors of Blue Chip companies compared to mid cap stocks and small cap stocks…. But do these factors make Blue Chip companies a Great Investment also? My answer is — No …. Why?
Because a Good Company does not necessarily mean a Good Investment….. There is a difference between a Good Company and Good Investment which most of retail investors do not understand…. When I ask investors why they invested in a particular company, they start telling the positive things about the company…. But they all miss the most important point to be remembered in Investing….. If a Good Company is trading at FAIR valuation, it becomes just an average investment…. And if a Good Company is trading at above the fair valuation, it even becomes a Bad Investment !!…. So a Good Investment means a Good Company available at undervalued price.
So coming to the main point as why I do not like Blue Chip companies…. Because Blue Chip companies are very less likely to be undervalued…. Blue Chip stocks are tracked by many stock research houses, stock analysts, HNI, Mutual Funds, FIIs…. So all the future potential of those companies are factored in the current price…. Even if a Blue Chip company is going to post 100% growth every year in next 3 years, it is not a Great Investment because all that growth potential is factored in the current price…. So how can then a retail investor make money? Read on …
Money is made by buying Good companies which are not famous, not tracked by research houses and investors…. Generally these type of companies are not very big….. But they have good business model, good margins, good future potential… Only thing is that they are not in limelight because investors are falling on each other to buy Blue Chip stocks….. Let us understand the point through a practical example below…. Things become very easy when understood through a practical example.
In April 2014, I gave very strong fundamental buy call at KPR Mills which was trading at 121…. When I studied the company, it looked me extremely undervalued…. I went in further depth and did some more research …. The more I researched, the more great the business of company looked to me and more undervalued it seemed to me…. Trading volumes very less and the company was listed on BSE only….. None of my investors friends even heard this name and when I told them about my new found Gem… I told them that I am going to take a major position in the company…. Nobody agreed with me and they also gave some investing lessons to me about Blue Chip companies…. But I could not ignore the company because its fundamentals were very sound and current price did not justify its fundamentals….. Those who know me know that I always play a lone hand in stock markets…. I only need my own conviction about a stock to take position…. If I am convinced then I take positions even if the whole world is against me…. So I bought the stock heavily in next few days…. I told this new found gem to all my followers at Facebook (All messages are saved of 2014)….. In the next 7 years, stock rocketed from 121 to 4700 (taking 1:1 split into factor) !!!! ….. Yes, 43 Times in 4 years…. And this price rise is not because of market rise…. Sensex was 23,000 in April 2014…. So Sensex rose just 150% in next 7 years and KPR Mills rose 4300 % !!! ….. And Chaman Lal Setia Exports multiplied 41 times in less than 4 years…!!!….Can any Blue Chip company multiply 41 times in 4 years ?…. That is why I invest in small cap stocks…. Only thing is that I buy QUALITY small caps.
Happy Investing !!