When trading blue-chip stocks you're never going uncover the next big thing. There's no extra points awarded for being unique. The only way we can be successful in our trades is by allowing ourselves to achieve our expectations.
Expecting Australia and New Zealand Banking Group (ASX: ANZ) or Commonwealth Bank of Australia (ASX: CBA) shares to jump by more than 20% this year is not rational because they are expensive across a number of financial metrics. In addition interest rates will likely rise and their shares will look riskier and less appealing next to term deposits, bonds and interest accounts.
In the same vein, purchasing Telstra Corporation Ltd (ASX: TLS) shares at current prices means investors will likely be expecting a solid 5.7% fully franked dividend and modest capital gains. However Telstra finds itself in the booming telecommunications sector with growing free cash flow and increased customer usage.
Unlike the banks it's not reliant upon unemployment figures, interest rates and competing for deposits. It boasts huge profit margins – on some products (such as fixed line) it has a return on equity more than three times larger than the banks – and sells products which are considered non-discretionary. It also dominates the whole industry.
In three years' time (provided we don't encounter a severe GFC-like event) Telstra's shares are likely to be trading higher and pay a bigger dividend. So today's price could well be a bargain.
On the other hand, we have the banks who are integral to Australia's economy and have the implicit guarantee of government backing. Unlike Telstra, the banks haven't dealt so well with pressure. In recent years, rapidly growing profits have masked the huge cost cutting and thinning profitability of the banks as regional lenders and diversified financials ramp-up pressure on the big four.
Net-interest margins have fallen whilst the increased threat of technology looms as more and more people use 'eWallets' on their electronic devices to conduct banking and everyday purchases. Would it be unrealistic to imagine a future where Telstra and Google Inc (NASDAQ: GOOG) control bank payments and transactions?
Foolish takeaway
All things considered, the current prices of big bank shares is demanding and investors would be hard-pressed to find arguable reasons as to why an investment in them could be justified. I for one believe Telstra has a much brighter future ahead and would withstand the impact of rising interest rates, unemployment and the technology giants looming on our doorstep much better than its blue-chip counterparts.
