Wesfarmers Ltd and Woolworths Limited: Should you buy?

There could be a better opportunity to purchase these blue-chips in the future.

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Many investors prefer to limit their portfolios to a selection of 'blue-chip' stocks. While there is no hard-rule as to what determines a blue-chip, in general it refers to: a very large stock (a Top 20 or Top 50 constituent), a high-quality business with defensive characteristics, a sustainable dividend payer, and an industry market leader.

The above list of attributes are certainly all positive criteria to look for in an investment so it's understandable that many portfolios are stacked full with blue-chip stocks.

Another important attribute of buying blue-chips is that if you have a really long timeframe then the quality of the company reduces the risk – in other words you can be a little more lax with the price you pay.

In contrast, if you buy a lower quality or smaller, higher risk company, then the price you pay becomes increasingly important!

Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) both fall well-and-truly into the blue-chip category and many investors would consider them both as 'buys'. This is not an unreasonable position to take if you have a really long investment timeframe. It's also not unreasonable if you believe the growth prospects are better than average and not fully reflected in their share prices, which trade on price-to-earnings multiples of 20.5 and 18.5 respectively.

When it comes to growth, Wesfarmers and Woolworths both have potential. Woolworths is pursuing its ambitions to enter the hardware sector via its rollout of the Masters Home Improvement brand. Wesfarmers meanwhile has a strong balance sheet with which to pursue growth initiatives and it stands to benefit when (or if) earnings from its coal division improve.

In my mind however, even allowing for earnings growth, both these businesses look fully valued with much more appealing opportunities available to investors elsewhere. Furthermore, there's a good chance that a patient investor will get the opportunity to purchase both of these high quality, blue-chip stocks at some point in the future at more appealing prices.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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