It is a common belief amongst investors that investing in "blue chip" stocks is a sure-fire way to building their wealth, but that isn't always the case.
In his ever popular investing guide, One Up on Wall Street, legendary investor Peter Lynch said "Buy the right stocks at the wrong price at the wrong time and you'll suffer great losses."
With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) trading near a seven-year high – hovering just below the 6,000 point mark – there are unfortunately a number of Australian stocks which appear to fit under that category right now. Here are nine blue-chips that investors would be wise to avoid for the foreseeable future.
Avoid these nine 'Value Traps'
Each of the nation's Big Four banks are the first that come to mind. Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have recently recorded new all-time highs, making them two of the most expensive bank stocks in the world, while Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have also rallied hard in recent years.
Granted, each of the Big Four have generated record-breaking profits in recent years, bolstered by strong growth in loans written and all-time low bad debt charges. But profit growth is expected to slow considerably over the coming years, making now a very questionable time and price at which to buy.
Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) are arguably in the same boat. Indeed, both represent fantastic companies which every investor should have on their watchlist, but could also struggle to generate market-beating returns in the long run from their current prices.
While some investors would argue that now is the opportune time to buy iron ore miners, I would have to disagree. The price of iron ore has rallied recently, providing tailwinds for BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG); but simple supply and demand economics suggest that prices will still retreat in the long run which would impact these companies' earnings.
Unfortunately, the Australian sharemarket is heavily weighted towards the banks and miners, making it difficult to avoid their lure. Luckily, there are still a number of blue-chips that are well worth your consideration today.
Load up on these five 'Blue-chip Bargains'
Three factors that investors need to keep in mind when shopping around for stocks are these:
- Low interest rates
- A falling Australian dollar
- Strong economic headwinds
Given its solid, fully franked dividend yield and its defensive earnings stream, Woolworths Limited (ASX: WOW) is an excellent candidate for every investor today. The shares have fallen heavily over the last 12 months and although the near-term outlook remains cloudy, long-term investors are being offered a good opportunity to buy a high-quality company at a significant discount.
Investors can also profit from a falling Australian dollar by investing in companies which generate a significant portion of their earnings offshore. Westfield Corp Ltd (ASX: WFD), Computershare Limited (ASX: CPU) and ResMed Inc. (CHESS) (ASX: RMD) are all excellent examples of companies that will benefit from this trend, with some economists expecting the dollar to fall below US70 cents in the near future.
Another company which could be a great pick-up today is Coca-Cola Amatil Ltd (ASX: CCL) – Australia's largest non-alcoholic beverage manufacturer. Following on from a two-year period most shareholders would prefer to forget, the company is expecting to make a return to earnings growth this financial year, while it also offers investors a compelling dividend yield at 4.1%, franked to 75%.
With the ASX 200 sitting near 6,000 points, finding reasonably-priced companies has become an increasingly difficult task. While the five blue-chip stocks mentioned above present as reasonable buys today, there's one more stock which could be an even greater buy today.
