When investors talk about quality stocks, they'll often use the phrase "blue chip." Unfortunately, even seasoned market analysts can't agree on a definition of this term. But they do agree that blue chip stocks have some very desirable attributes.
So what exactly are these high-quality stocks? The term "blue chip" itself is a reference to placing a wager. At one time, blue was the color of the highest-valued wagering chip, so the term is actually referring to stocks that are considered "safe bets."
History tells us a blue chip stock is one that is very likely to provide a fair return on investment. In order to do so, a stock must have a proven track record, be financially sound, and must be somewhat insulated from the cycles of the economy.
Terms that are often used in conjunction with blue chip include "bellwether" and even "large cap." Bellwether is used to describe a company that is recognized as the leader in its industry. For example, Microsoft would be considered a bellwether stock for computer software.
Large cap is a reference to the size of a company in terms of total market capitalization. Market capitalization is calculated by taking the number of shares outstanding and multiplying by the stock's current price per share. It's the value of all the company's shares of common stock owned by investors.
Perhaps the most famous list of 30 blue chip stocks is the Dow Jones Industrial Average. First published in 1826, the 30 companies in the DJIA are carefully selected from a variety of industries to provide a good indication of the American economy's health. While the performance of any individual member of the DJIA will fluctuate over time, most investors would agree the Dow is a good benchmark for identifying blue chip stocks.
We're going to use a stock screener to develop a quick list of what would be considered blue chip stocks. Before doing so, it's important to have a quantifiable definition. That means we need to translate the characteristics described above into parameters to be entered into the screening tool.
During this exercise, we used the following criteria to develop the list of ten blue chip stocks appearing in the table below:
|DOW||Dow Chemical Co.|
|ADI||Analog Devices, Inc.|
|JNJ||Johnson & Johnson|
Of the ten stocks found using the stock screener, and based on our definition of a blue chip stock:
This is a surprisingly good outcome; given the fact the stock screen was based on several relatively simple search criteria.
Investors looking to purchase blue chip stocks have several options. Perhaps the easiest way is to purchase a mutual fund based on the Dow Jones Industrial Index, or the Dogs of the Dow. A second option is to purchase an exchange traded fund such as the Dow Diamonds.
Finally, those investors interested in buying stocks of individual companies might want to read through our series on Stock Research. In those articles is found a step-by-step method to help identify not only blue chip stocks, but also stocks that might be undervalued.
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