The list of ASX blue-chips is starting to look a little overvalued. Not grossly overvalued, because many of the companies in there are turning out stellar results, but they're not cheap by any means. Woolworths Limited (ASX: WOW), Australia New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have hit all-time highs in the past few days, but investors are still buying them.
The trouble with buying shares when they're at all-time highs is that you are essentially using your money as collateral for the risk of breaking new ground. Look at any company's price history chart – after every peak, there is always a trough. If you buy when a company is at its most expensive, you run the risk of the share price falling, and then you have to wait for the price to recover before seeing any gains. If you buy when a company is at its peak and looks expensive, you double the risk.
Of course the counter to this argument is the fact that hitting new highs is an essential part of company growth. ANZ, Westpac and Woolies are all turning out very high revenues, so it stands to reason that the share price should rise to reflect that.
Instead you might want to try buying companies that are out of favour with the market, like these three market rejects.
Alternatively, you could look to buy companies that can develop growth opportunities largely independently of what the broader economy is doing. Every well successfully developed by companies like Beach Energy Limited (ASX: BPT) and Woodside Petroleum Limited (ASX: WPL) increases the company's size and potential earnings. Both oil/LNG producers are trading close to 52-week peaks, yet there is still value to be realised from future exploration and LNG exports which begin next year. Woodside has the added advantage of being a blue-chip stock with a great dividend, and is rumoured to be considering a takeover of Oil Search Limited (ASX: OSH), which could be a considerable coup for the company.
Foolish takeaway
It's not that buying the big banks and Woolworths is a poor investing decision, it's more that there is better upside potential to be realised elsewhere in the market, even among the blue chips.
