When stock market commentators talk about blue chips, it's not all that easy to work out which stocks they are talking about.
Do they mean every stock in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) or just the S&P/ASX 20 (ASX: ^AXTL) (ASX: XTL)? Obviously, there's quite a difference. Or perhaps they mean just a subset of those companies? If so, which ones?
In my opinion, blue chip stocks are large companies that have proven track records (even if newly listed) of generating growing revenues and profits, and, in particular, rarely disappointing investors. But, my definition is obviously different to others, so here's a list of large ASX 200 companies, regarded as blue chip stocks by some that I'd never buy. Bear in mind that never is a long time, and there's usually a price at which any asset is a bargain, but these companies are unattractive as investments and I'll explain why briefly.
It may be an obvious reason, but I don't think there's a strong future for coal companies such as Whitehaven Coal Limited (ASX: WHC), as renewable energy gathers pace. Not to mention that as a commodities company, Whitehaven is totally reliant on the commodities price – which is outside the company's control, capital intensive and unlikely to pay dividends consistently.
You can add resource stocks Iluka Resources Ltd (ASX: ILU), Rio Tinto Limited (ASX: RIO), Oz Minerals Limited (ASX: OZL), Sirius Resources NL (ASX: SIR), Newcrest Mining Limited (ASX: NCM), Independence Group NL (ASX: IGO) and Fortescue Metals Group Limited (ASX: FMG) to that list of blue chips I wouldn't buy for similar reasons to Whitehaven.
Companies with skinny margins, but higher-risk operations are also on the outer. You can forget about seeing contractors like Leighton Holdings Limited (ASX: LEI), Downer EDI Limited (ASX: DOW), Transfield Services Limited (ASX: TSE), UGL Limited (ASX: UGL) and Spotless Group Holdings Ltd (ASX: SPO) in my portfolio.
As much as I'd like to support Australia's agricultural companies, they simply have too many factors outside their control to be investment grade. They are commodity companies – albeit soft commodities such as grains and proteins such as grains and cattle – but still dependent on the market to set the price of their products. That dumps Graincorp Ltd (ASX: GNC) and Australian Agricultural Company Ltd (ASX: AAC) from my buy list.
Transport companies including airlines also tend to be poor investments in many circumstances, thanks to their capital intensive nature. Qantas Airways Limited (ASX: QAN) and Toll Holdings Ltd (ASX: TOL) would never have made it onto my watchlist of quality companies.
Steel companies Bluescope Steel Limited (ASX: BSL) and Sims Metal Management Ltd (ASX: SGM), and aluminium producer Alumina Ltd (ASX: AWC) are also off the table, for being too capital intensive as well as captive to commodity prices.
If you want to know one company I'd consider a worthy contender for my portfolio, read on.
