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It’s suddenly getting very ugly for the blue chips

You could easily be forgiven for thinking we’re in a bear market…

The Telstra Corporation Ltd (ASX: TLS) is down over 20 per cent in just the last two months.

Iron ore continues to fall, on track for its worst monthly performance since May last year.

The big four bank stocks are holding up relatively well, but with all this talk about a house price crash, it feels like they are ripe for a fall.

The Reserve Bank of Australia (RBA) is even warning of a “downswing in housing prices,” with one third of borrowers effectively have no buffer on repayments.

Domestically, the political situation is dire… and that’s before the upcoming budget, which will deliver deficits until kingdom come and as much joy as a pimple on the end of your tongue.

North Korea is promising “all out war” if trigger-happy Trump actually pulls the trigger.

The gold price eased a little over the weekend, sending investors in gold stocks heading for the hills. Sentiment has not been helped by Newcrest Mining’s flagship New South Wales mine being hit by a “large seismic event” on Good Friday, with operations ceased indefinitely. The Newcrest Mining Limited (ASX: NCM) share price has today fallen 6 per cent to $23.60.

So much for gold’s safe-haven status.

You can almost hear the bear growling…

And yet, overnight Wall Street soared, the Dow adding 183 points to close at 20,637, just a couple of percentage points off its all-time high. US investors are looking forward to the best quarterly reporting season since 2011, according to Factset.

For the longest time, the ASX has followed Wall Street’s lead, up or down.

But not today.

The S&P/ASX 200 Index is well and truly taking it on the chin, down 60 points to around 5,830.

When it comes to the large-cap stocks, Australia is largely a four trick pony.

Trick #1 — Banks.

Trick #2 — Mining.

Trick #3 — Telstra.

Trick #4 — Supermarkets.

Most Australians — either directly or through their superannuation — have big, outsized holdings in all four sectors.

It’s something that has largely served them very well over the years — capital appreciation coupled with years of juicy fully franked dividends has that effect.

But it’s the future that counts, and from here, the future looks nothing like the past… and that’s without a housing correction.

The banks are expensive, and growing slowly, if at all. Just about the only thing they have going for them is their fully franked dividends.

Mining stocks are capital intensive, cyclical and price takers. The times when they look cheap — as the likes of Fortescue Metals Group Limited (ASX: FMG) and BHP Billiton Limited (ASX: BHP) shares do now — is often the time to run for the hills. The Fortescue share price has fallen over 20 per cent in the last month alone.

Telstra. Competition’s a killer. The further the Telstra share price falls — it’s now trading at close to $4.00 — the more likely it is to cut its dividend.

For slow growers operating in a very competitive market, Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) are trading at very expensive valuations. Supermarket profit margins are only going one way — down.

So where do you turn?

Speculative penny stocks sound great in theory — who doesn’t like the prospect of a 3 cent stock doubling to 6 cents — but they are almost always a one-way ticket to the poor house.

The stock market itself is cyclical.

Since Trump’s shock election win, investors have literally piled into the ASX blue chips, pushing them up over 14 per cent.

By contrast, the small caps have well and truly been left behind.

Data by YCharts

The ASX Small Ordinaries Index is made up of many things, including a number of companies that are anything but small. Washington H. Soul Pattinson and Co. Ltd (ASX:SOL), for example, is capitalised at $4.5 billion.

But what is does house is a whole bunch of growth stocks, companies that are not only growing their profits, but also their fully franked dividends.

Take Webjet Limited (ASX: WEB), for example. In its most recent half year results, the company grew revenue by 48 per cent, net profit after tax by a whopping 87 per cent, enabling the digital travel company to increase its fully franked interim dividend by 15 per cent.

Or Greencross Limited (ASX: GXL). The vet to pet store company grew revenue by 14 per cent and underlying net profit after tax by 9 per cent, enabling it to increase its full franked interim dividend by 6 per cent, continuing its impressive dividend history.

Source: ASX

Those sorts of growth rates put the blue chips to shame.
There’s a whole world of opportunity outside the popular, yet very expensive blue chips.

Small cap growth stocks — especially those paying growing fully franked dividends, have been out of favour in recent months. But just as earnings growth is powering US stocks higher, the same will ultimately happen here.

The tide is turning, and turning now.

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Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton, Telstra and Webjet.

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