Can these 3 blue chip stocks beat the market?

Credit: Thorsten Hecht Flickr

One fund manager certainly thinks so.

According to John Murray, fund manager and founder of Perennial Value Management, it’s been a frustrating year for value investors – but there is still value to be found, even among the blue chips.

Mr Murray has told Fairfax Media that investors have been attracted to the ‘so-called defensive’ stocks including toll road operator Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD) and biopharma group CSL Limited (ASX: CSL).

Those three have seen their share price rise by 26%, 36% and 25% respectively over the past twelve months.

But he says these companies are now trading on extreme valuations, and the perception of certainty in earnings in shares is flawed.

Unwilling to take a bet on those types of stocks, Mr Murray says he is looking elsewhere and has found a number of unloved stocks that are opportunities. They include Event Hospitality and Entertainment Ltd (ASX: EVT), Crown Resorts Ltd (ASX: CWN) and AMP Limited (ASX: AMP).

Event is up 18.4% in the past year, although flat in the past six months. Crown’s share price is down 3.6% over the past year and AMP has dropped 8.3%. They certainly appear unloved by the market despite the 12.8% growth in dividends per share per year.

Mr Murray points to catalysts that could drive their earnings higher including a lift in tourism for Event Hospitality, a demerger of its Asian assets for Crown and efficiencies in AMP.

However, Event Hospitality doesn’t appear cheap, trading on a trailing P/E of 18.2x and paying a 3.3% fully franked dividend. Crown doesn’t appear cheap either – with a P/E of 22.5x and a 4% partly franked dividend.

AMP is not what I would consider an investment grade stock – having delivered a total shareholder return of just 1.3% over the past 10 years, with earnings and dividends going backwards over the same period.

Foolish takeaway

Contrarian investors can do well when they avoid the stocks the market loves – but it also pays to stick to high quality companies that are cheap, and I’d be looking at the mid-cap space rather than the blue chips here.

If you absolutely must have blue chip stocks then you might want to consider these three.

Discover The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

Motley Fool writer/analyst Mike King owns shares in CSL Limited. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.