I'm sorry to tell you, but not everything you've heard about blue chip stocks is true…
Investors tend to believe blue chip stocks are the safest and most reliable on the ASX, and there is merit to that theory.
They're typically the most recognisable companies, and often make up a significant portion of Australian portfolios — for both retail and institutional investors.
Generally, they also represent businesses that we simply couldn't live without.
Think Woolworths Limited (ASX: WOW) and Commonwealth Bank of Australia (ASX: CBA).
We need food to survive, no matter the state of the economy. Likewise, we need banks to fund items most of us couldn't possibly afford outright, such as homes and cars, while businesses often also need borrowed funds to grow.
BHP Billiton Limited (ASX: BHP) is another great example. We need steel for roads and the construction of other infrastructure, together with various smaller items.
The wide scale use of solar energy is still a long way off, so we'll likely still need oil and coal for a long time yet as well.
All that is true about blue chip stocks. It's also true that many have generated enormous returns for those investors who have held onto their shares over the last decade or two.
But one thing many investors fail to consider is that blue chip stocks are not invincible.
In fact, The Australian Financial Review even said recently that:
"There's a changing of the guard within the largest and most recognised blue-chip companies."
No longer can investors simply assume these companies are the biggest and therefore the best.
No longer can investors assume they're safe to buy the blue chip stocks at just any price and assume they'll keep rising.
There is a changing of the guard, and companies that are being caught flat-footed could well get left behind.
Let's look at Woolworths again. The supermarket giant has issued numerous profit warnings over the last year or so as a result of its intense battle with Coles, owned by Wesfarmers Ltd (ASX: WES).
Coles itself is then being threatened by the uprising of discount brand Aldi, and the U.S.-based Costco.
Commonwealth Bank drove the market to its highest level in years, yet it too fell into a bear market in recent months.
Tough competition, digital disruption and stricter regulations could all limit growth for Commonwealth Bank and its Big Four bank brethren in the future.
And then there's BHP Billiton, which hardly needs an update on its woes.
Commodity prices are crashing, as are the group's earnings; China's growth is waning; and its 'progressive dividend' policy is widely considered to be unsustainable.
While some of Australia's traditional 'blue chip' stocks are crumbling however, there are plenty of others that seem destined to become the blue chips of the future.
Tomorrow's Blue Chips
Take REA Group Ltd (ASX: REA) as a perfect example.
From its humble beginnings in 1995, from a garage in the Eastern suburbs of Melbourne, REA Group has become a leading operator in global real estate portals.
It's likely you're familiar with its primary website, realestate.com.au, but the company is quickly expanding overseas and could become much, much bigger than what it is today.
There are plenty of other great companies poised to become tomorrow's 'blue chip' stocks, while others could potentially go down that path in the future.
Think 1-Page Ltd (ASX: 1PG) if its talent sourcing platform truly takes off, or Bellamy's Australia Ltd (ASX: BAL) if demand for its infant formula continues to soar.
Indeed, picking tomorrow's blue chip corporations is no easy task – there's certainly no exact science to it!
But there are a few things that can guide you in the right direction…
- Look for companies that reside in high growth industries, and have the potential for disruption
- Look for companies that have something meaningful to offer
- Look for companies with strong balance sheets – plenty of cash and, ideally, limited debt
- Look for companies with wide moats – or sustainable competitive advantages
Indeed, members of Motley Fool Share Advisor will find plenty of companies that fit this description on the service's impressive scorecard.
Picked by Scott Phillips and his team, many are also handily outperforming the share market since their time of recommendation, earning those members who followed Scott's advice some very handsome returns.
They'll also note however, that not one of the major banks has made it to the "buy" list yet. Nor have any of the miners or Woolworths.
Why?
Because although they're blue chips, they don't necessarily offer the growth potential required to deliver market-beating performances – at least not in Scott's opinion — nor are they the best companies for new investment dollars today.
Instead, Scott is focused on picking tomorrow's winners. The ones with wide moats and strong balance sheets. Those that have plenty of room to growand disrupt, making members some healthy profits along the way.
If you're keen to know what tomorrow's blue chip winners could look like, I urge you to not hesitate in joining today.
