John Wasiliev
September 28, 2010This image is helped by the fact they are mostly among the largest companies on the share market and when times get tough big can often be better. Or is it?
After the share market crashed in 2007 to 2008, it was the blue chips that were recommended as the safest options for investors or prospective share investors looking to establish a core portfolio.
Back in September 2008, for instance, the recommended blue chips included BHP Billiton and Rio Tinto, all the big four banks, gold miner Newcrest, oil giant Woodside, transport services company Brambles, the health industry twins CSL and Cochlear, retailer Woolworths, energy sector leader AGL and telecommunications leader Telstra.
It's worth looking back to see how these shares have performed. Two years ago, for example, in late September 2008, BHP shares were trading at around $35.80 and Rio shares were priced at $79.60. Newcrest shares were trading at around $21 and Woodside at $49.60 with Brambles at $8.40. Westpac shares were trading at $24 and Commonwealth Bank shares at $44.40. CSL shares were at $38.20, Woolworths at $28.10 and Telstra at $4.35.
By comparison as September 2010 comes to a close, BHP shares are trading higher at $39.20, Rio shares are lower at $76, Newcrest has soared to $41, Woodside has dropped to $44.40, Westpac is flat at $24, Commonwealth shares are better are $52.40, CSL has slipped to $33.70, Brambles is down to at $6.20, Woolworths is holding at $28.90 and Telstra has plunged to $2.70. What this performance scoreboard shows is that over this period there have been winners and losers among the blue chips.
Some investors who listened to the blue chip story would be happy, while others might regard investing in what are promoted as the best shares you can buy as being an easy way of losing money.
The lesson in this missed bag of returns, says Elio D’Amato of share market researcher Lincoln Indicators, is that just because a company is big does not guarantee its success. Big is not necessarily beautiful and because a big company is or isn’t doing as well as others often has little to do with its size.
Rather than size, he says, what determines whether a company is performing well on the share market will have more to do with factors such as the business it is in and how well it is responding to different challenges.
It is an argument, he says, in favour of investing in profitable companies of all sizes rather than just big companies. That’s not to say big companies can’t stand out at times. Gold miner Newcrest, for example, has benefited from the fact the price of gold has risen from about $US800 an ounce in September 2008 to just under $US1,300, a more than 60 per cent gain.At the other end of spectrum, Telstra’s profit performance has been lacklustre and this is reflected in its depressed price. It’s been a similar disappointing profits story with Brambles.
D’Amato says there might be special reasons why some are lagging. For example, CSL has had to face the challenges of a rising Australian dollar because a sizeable proportion of its profits are earned overseas and must be converted back to Australian dollars when they are distributed to investors.
Two years ago the $US-Australian dollar exchange rate was US83c compared to the most recent price of US95c.
http://www.smh.com.au/money/on-the-money/big-blue-chips-not-always-beautiful-20100924-15pul.html
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