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Investing in Blue Chips: Why It Can Still Be Risky

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The Motley Fool Singapore

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There are some who think that blue chip stocks are the bastion of investing stability. Huge companies with massive profits – what could go wrong? Well, not so much a Lehman Brothers-like collapse, but The Motley Fool has some advice on putting all your hopes on just any blue chip stock:

In the context of Singapore’s stock market, the 30 companies that make up the Straits Times Index(SGX: ^STI) are often known as the ‘blue chips’. These are 30 of some of Singapore’s largest publicly-listed companies and by virtue of that fact, there’s often a positive connotation that goes with them. But, it’s not necessarily the case where a blue chip would present lesser risks to investors.

The shipping firm Neptune Orient Lines (SGX: N03), which was still a blue chip share within the Straits Times Index up until 24 Sep 2012 when it was replaced by IHH Healthcare Berhad(SGX: Q0F), provides a great example of why that’s so.

Investors who inadvertently invested in NOL while it was still a blue chip thinking it was safe because it was part of the prestigious Straits Times Index would have suffered some bad losses and missed opportunities along the way.

For instance, NOL was trading at S$2.18 apiece at the start of 2011, only for investors to see it fall 55% to S$0.975 currently. In contrast, the broader market, as represented by the Straits Times Index, had only dipped by 3% to 3,085 points in the same time.

That huge discrepancy between NOL and the market’s price performance would not be much of a mystery when we look back at how NOL’s business has performed, which could perhaps be aptly reflected by an announcement the shipping firm made yesterday.

 

NOL’s Business

On the evening of 25 Feb 2014, NOL warned that it might be placed on a watch list of companies that stock exchange operator Singapore Exchange keeps.

Under the SGX’s listing rules, companies get placed under a watch list if it records: 1) pre-tax losses excluding one-off events for three of its most recent completed financial years; and 2) an average daily market capitalisation of less than S$40 million over the last 120 market days.

NOL had just released its full-year results for 2013 on 20 Feb 2014 and despite seeing improvements in its operations, still suffered a pre-tax loss of US$208 million excluding one-off gains according to S&P Capital IQ. That was preceded by pre-tax losses (again, excluding non-recurrent events) of US$261 million and US$412 million in 2012 and 2011 respectively as an oversupply of ships within the shipping industry had affected the company badly.

With these earnings figures, the shipping firm had found itself meeting the first criterion for a potential candidate to be included into SGX’s watch list.

And even though NOL’s current market capitalisation of S$2.53 billion shows the company’s still a long way off from fulfilling the second criterion, the shipping firm still runs the real risk of being part of SGX’s watch list – a list populated by companies facing difficult business environments and challenges.

SGX conducts a quarterly review of the list of possible-entries into the watch list at the start of March, June, September, and December each year and NOL would only know of its watch-list-status when the stock exchange operator completes its review.

To sum up, the experience of NOL serves to highlight how crucial it is for investors to focus on what’s important – the price we’re paying for a share and the possible long-term future of the share’s corporate results – and ignore superfluous labels and information like how a share must be safe and sturdy just because it’s a blue chip that’s part of an important market index.

 

What are your thoughts on blue chip stocks? Have you had any experiences in the past that have shaped your investing perspectives? Share them here!

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