According to Wikipedia, investors associate the term ‘blue-chip’ with “a national reputation for quality, reliability, and the ability to operate profitably in good times and bad”. And yet in the case of Australian stocks, accepted ‘blue-chip’ companies have proven to be somewhat of a misnomer.
The ASX20; widely considered an index of blue-chip companies; includes both QBE Insurance Group Ltd (ASX: QBE) and Newcrest Mining Limited (ASX: NCM), both are due to post a loss in 2013-14. Similarly, the ASX50, also considered a blue-chip index, contains Qantas Airways Limited (ASX: QAN) and Worleyparsons Limited (ASX: WOR), which are both struggling through structural changes to their respective industries.
I am personally not a fan of the term ‘blue-chip’ to describe companies, as it lumps a diverse range of companies into one basket, but following the companies in the ASX20 and ASX50 occasionally presents opportunities to be “greedy when others are fearful”, as a great man once said. There are many examples of this. The GFC (obviously), mid-2012 when bank stocks and the wider market dropped nearly 20%, or mid-2013 when the iron ore price dropped off a cliff to US$90 per tonne. These times represented opportunities for long-term investors to get companies on sale. Since mid-2012 the banks are up over 50% and since mid-2013 the big miners have also posted very handsome gains.
So what companies are on sale now? The team over at the Australian Financial Review have tipped six large-cap companies with ‘blue-chip’ characteristics that could be poised to outperform in 2014. The list reads: Leighton Holdings Limited (ASX: LEI), Newcrest Mining, Oz Minerals Limited (ASX: OZL), Qantas, QBE Insurance, and Worley Parsons.
The media campaign against Leighton Holdings in the second half of 2013 cut the share price from a high of $19.87 in September, to a low of $15.09 in December (it started the year above $24). The company has a huge amount of work on its books which should sustain profitability in 2014 and 2015. At $15.65 the current price may present a long-term buying opportunity.
Newcrest had a similarly difficult year, as the falling gold price and operational difficulties conspired to smash the share price from $24.77 early in the year, to $6.96 at the end of the year. Having already recovered somewhat to $8.53, the company is well positioned to deliver in 2014-15 with long-life, low-cost mines, as long as the gold price shows some strength.
Oz Minerals on Wednesday delivered a bumper production report which sent the share price soaring 15%. Oz Minerals could be a big beneficiary of rising copper prices due to increased global demand in the next 12 to 24 months.
Qantas’ woes have been well documented in recent months. Having recovered from an all-time low of 95 cents in December, to now trade at $1.10, the share price could be in for a boost if the company can successfully realise the full value of its frequent flyer program and other business assets.
QBE also had a difficult end to the year, with a profit downgrade resulting in a share price fall of 30% over a couple of days. The full-year loss will mainly be a ‘paper loss’, as QBE will generate free cashflow of nearly a billion dollars and is certainly due for a turnaround in 2014.
Finally, WorleyParsons’ share price is down 30% over the past 12 months, after a profit downgrade and general malaise around the mining services sector weighed on the company. Thankfully, the group is exposed to the buoyant energy and gas sector, which is expected to be boosted by rising energy prices in the year to come.
Being greedy when others are fearful, and fearful when others are greedy is a good recipe for long-term success in investing; assuming the right opportunities are picked. The six companies above are considered blue-chip, due to their long-term history of solid performances and could deliver great returns in 2014, if they can turnaround the struggling components of their respective businesses.
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Motley Fool contributor Andrew Mudie owns shares in QBE