Author Topic: Blue Chip Stock Investing curiosity/question  (Read 5502 times)

SingleMomDebt

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Blue Chip Stock Investing curiosity/question
« on: December 27, 2014, 01:33:54 PM »
I love statistics and can am good w/numbers in my field of research. I began to think maybe I could have some rhyme & reason to apply it towards investing overall. Someone peaked my interest into the subject of blue chip stocks. Now I've dived into learning about the subject.

Reading this article: http://www.investopedia.com/articles/investing/102813/analyzing-bluechip-stocks.asp

This was not the only article I have read to learn about BCS, but from this article, I took the numbers and applied it to PG and JNJ. As a exercise to myself. Now I need some grading. :) or critique, value, insight, etc...



Am I generally right to say, based on the numbers above, that Johnson & Johnson would be the better of the two to invest in? Would this be generally right? Why or Why not?

PS: will not invest until my hair-on-fire-debt is gone. but makes for a great time learning.

**Mr. Moderator, I 'removed topic' from AAM to added it here.
« Last Edit: December 28, 2014, 10:48:20 AM by Chippewa »

YoungInvestor

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Re: Blue Chip Stock Investing curiosity/question
« Reply #1 on: December 27, 2014, 01:47:13 PM »
I generally try to make sure that I understand WHY a company is trading at lower multiples than another one before investing. Sometimes it reveals a decent reason, sometimes it seems like hype is doing its thing.

Your analysis seems good, but here are some other stats to consider:

P/B seem similar.

What is the growth factor to be applied to EPS on each company? Was there a similar difference in P/E of the last quarter?Different International/domestic exposure? Maybe P&G simply has interesting products in the pipeline? Maybe the less attractive dividend yield is what's in play here: At the same P/E, it would be much less attractive.

I truly don't know much. But I would make sure to put some effort into figuring why the valuations are so different.

But if I had a gun to my head and had to make a choice, I'd pick J&J as well.

SingleMomDebt

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Re: Blue Chip Stock Investing curiosity/question
« Reply #2 on: December 27, 2014, 03:08:46 PM »
Good, I'm learning stuff here. Did not know what a 'multiple' was until looking it up. And looking at my numbers, I can now tell from an outside preview, that they were gathered from a couple different sources. This is good to understand.

As I understand it PG is a more expensive company to run with a large DTI.
I've also heard of companies manipulating numbers. But know I i will not be able to understand the potential error in numbers until I have more experience behind me.
I will need to sit with the other factors you listed, so as to absorb their understanding. Thank you for bringing these other things to look at into the picture. I can see it might get complicated for me to analyze stocks until I get a 'system' and/or spreadsheet down.
So I guess it would be favorable in addition to mapping the stats, is to read the prospectus? ;)
Where else do you find information about the companies in question? Reading the business section? (yes, newbie Q).

Anyone have a good book to recommend regarding blue chip stocks?

sheepstache

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Re: Blue Chip Stock Investing curiosity/question
« Reply #3 on: December 27, 2014, 06:07:29 PM »
I don't do this sort of thing myself so don't take this as a recommendation per se, but I think Joshua Kennon's articles on About.com are supposed to be really good.

Also if you go to his blog, particularly the stuff on the KRIP portfolio, he writes articles about a number of blue chip stocks like J&J that he really likes. Your question reminds me of his article comparing McCormick and Carnival.

wtjbatman

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Re: Blue Chip Stock Investing curiosity/question
« Reply #4 on: December 27, 2014, 07:36:47 PM »
This website is more generalized, but has crowd-source articles covering a variety of investment topics, including analysis of blue chip stocks: http://www.seekingalpha.com

I read it pretty regularly, even though I now invest primarily in index funds instead of dividend growth stocks.

SingleMomDebt

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Re: Blue Chip Stock Investing curiosity/question
« Reply #5 on: December 27, 2014, 08:28:40 PM »
Great article sheepstache! Thank you for sharing. I started waging MKC for my virtual portfolio, after reading the article. But is not looking intuitively promising. But what do I know?! The virtual findings shall tell the tale. ;)

wtjbatman thank you! I'm not sure how you read this all regularly. Makes my head spin. Checking out their dividends & income section. Thanks!

hodedofome

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Re: Blue Chip Stock Investing curiosity/question
« Reply #6 on: December 27, 2014, 09:47:53 PM »
Dividendgrowthinvestor.com is a pretty good site for this kind of stuff, he does good research.

A lot of guys I know with statistics/engineering backgrounds usually go the quant route rather than discretionary investing route. As in, you program a system that tells you what to buy and sell. You may want to look into that. Trend Following by Michael Covel on the systematic trading side, later writings by Benjamin Graham and Joel Greenblatt on the investing side. Both can get you started on quant/systematic stuff.

innerscorecard

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Re: Blue Chip Stock Investing curiosity/question
« Reply #7 on: December 28, 2014, 06:26:26 AM »
I don't do this sort of thing myself so don't take this as a recommendation per se, but I think Joshua Kennon's articles on About.com are supposed to be really good.

Also if you go to his blog, particularly the stuff on the KRIP portfolio, he writes articles about a number of blue chip stocks like J&J that he really likes. Your question reminds me of his article comparing McCormick and Carnival.

Joshua is also great about writing detailed responses to answer people's questions on his personal blog.

GGNoob

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Re: Blue Chip Stock Investing curiosity/question
« Reply #8 on: December 28, 2014, 09:24:58 AM »
I only invest in index funds, but I saw this website recently and it seems interesting: https://stockflare.com/

SingleMomDebt

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Re: Blue Chip Stock Investing curiosity/question
« Reply #9 on: December 28, 2014, 10:39:35 AM »
Dividendgrowthinvestor.com is a pretty good site for this kind of stuff, he does good research.

A lot of guys I know with statistics/engineering backgrounds usually go the quant route rather than discretionary investing route. As in, you program a system that tells you what to buy and sell. You may want to look into that. Trend Following by Michael Covel on the systematic trading side, later writings by Benjamin Graham and Joel Greenblatt on the investing side. Both can get you started on quant/systematic stuff.
Thank you for the info! Such gems. Dividendgrowthinvestor.com was exactly the sort of info I was looking for. Dived into last night.

And will Check out the other info soon.

I really should rename the title of this post to dividend investing or something similar.

And I wish I was aware of rhis method of investing 10 years ago when I was trying to draw passive income to travel. This would have been a smarter route to take (for various reasons) than starting my own business.

Now am trying to decide if I should go the dividend investing route or with IF. I'd love to do both...lol.

I'm seeing a possibility this might be something worthwhile to get my teen daughter to focus on as it could be rather beneficial in her young adult life. At least for the purposes of drawing a dividend income for adventure. What joy!

SingleMomDebt

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Re: Blue Chip Stock Investing curiosity/question
« Reply #10 on: December 28, 2014, 10:44:10 AM »
@innerscorecard thank you for affirming that info. I will definitely seek out and am excited with all this new info.

@Logan T thank you so much for adding further valuable info to the pot. While I don't not want to mix thread info, I am also reading John Bogle's book The Little Book of Common Sense Investing about IFs. I'm quite Gung ho on all the info. Now just to eradicate the big bad debt of mine  efore having the ability to dive in!

wtjbatman

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Re: Blue Chip Stock Investing curiosity/question
« Reply #11 on: December 28, 2014, 02:05:33 PM »
http://www.dividendmantra.com Is a really great dividend growth investing blog. He doesn't go as in depth analyzing stocks as someone like dividendgrowthinvestor, but it's still a really fun blog to read.

innerscorecard

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Re: Blue Chip Stock Investing curiosity/question
« Reply #12 on: December 28, 2014, 10:29:52 PM »
The thing with picking individual stocks is that a little knowledge is extremely dangerous. If you want to pick stocks, you'd better be prepared to do a lot of reading and learning about finance and accounting. It's a DIY method that involves a lot of work, when at the same time you could get perfectly good results simply indexing.

This forum recommends the exact same thing (DIY) with everything but stocks. There's a good reason for that, actually. There's nothing like an index fund for plumbing that simply solves the problem for you satisfactorily. (I do think there is one for electronics - Apple products, but those are mostly hated here.)

Scandium

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Re: Blue Chip Stock Investing curiosity/question
« Reply #13 on: December 29, 2014, 07:12:17 AM »
If those stocks sell at those multiples, that means an  huge number of traders and analysts (with PhDs, supercomputers and $100,000+ bonuses) have poured over every detail of those companies (including information you can't access) and decided that's what they're worth right now. So without looking at a single number I'd confidently say they are exactly equally good to invest in. One will outperform the other, but right now we cannot know which.

How do you figure your six lines in excel will reveal something these people haven't seen?

JayGatsby

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Re: Blue Chip Stock Investing curiosity/question
« Reply #14 on: December 29, 2014, 12:02:54 PM »
One thing to always be on the lookout when comparing two individual companies based simply off of their fundamentals is value traps.  Companies can look very attractive off of their P/E's when they're actually at a cycle peak, and look expensive for opposite reasons.

A good example right now would be a lot of the rail car builders. They've had a phenomenal run over the last few years, as a massive amount of new railcars have had to be built in order to ship oil around the country due to the U.S. oil boom. With oil prices dropping 50% though, the question investors in these companies are trying to determine is if the amount of railcars ordered in the previous year is sustainable, or if it's the peak of the cycle.

If you think the oil renaissance will continue, and this oil price drop is a blip on the radar, then these companies are fantastically cheap (trailing P/E's at 7-10 times earnings).  If you think the number of orders are about to dry up a 2016 and beyond will face a abrupt end to rail cars orders for the next few years following (until the existing cars need to be replaced), then even though these companies have a P/E of 8, they are expensive. And you'd be better off investing in a blue chip at a 22 PE.

Now that's the hard thing about investing in individual stocks instead of indexes. The absolute key is being able to determine what is noise versus what is real. Is this crash in oil prices noise, or is it real? If you know the answer, you can either profit handsomely OR avoid making a costly mistake.

LordSquidworth

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Re: Blue Chip Stock Investing curiosity/question
« Reply #15 on: December 30, 2014, 08:38:52 AM »
I love statistics and can am good w/numbers in my field of research. I began to think maybe I could have some rhyme & reason to apply it towards investing overall. Someone peaked my interest into the subject of blue chip stocks. Now I've dived into learning about the subject.

Reading this article: http://www.investopedia.com/articles/investing/102813/analyzing-bluechip-stocks.asp

This was not the only article I have read to learn about BCS, but from this article, I took the numbers and applied it to PG and JNJ. As a exercise to myself. Now I need some grading. :) or critique, value, insight, etc...



Am I generally right to say, based on the numbers above, that Johnson & Johnson would be the better of the two to invest in? Would this be generally right? Why or Why not?

PS: will not invest until my hair-on-fire-debt is gone. but makes for a great time learning.

**Mr. Moderator, I 'removed topic' from AAM to added it here.

That's a start. From there you'd do a little more digging. They're both big, well know, established companies.

Being familiar with both companies, both of which are well suited for holding long term, you're essentially getting more company for your dollar with JNJ.

Just eyeballing it, you could probably get PG for a better price (compare it to something like UL). It's cost, while not terrible, is a little high for a consumer goods company, imo. Same can be said of JNJ, but it's price is currently more attractive.

innerscorecard

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Re: Blue Chip Stock Investing curiosity/question
« Reply #16 on: December 30, 2014, 07:07:35 PM »
While Scandium and I vociferously disagree on some things (see my thread on why some sophisticated investors shouldn't index), I agree with him or her here that the efficient market hypothesis should be starting point for your analysis. You won't get good results by doing very superficial analysis that is only a few ratios.

The ABSOLUTE minimum (and that's really pushing it) you should do is the level of analysis that Jason Fieber on Dividend Mantra does. That's an example of an individual investor who does somewhat adequate research on blue-chip dividend-paying stocks. If you can't meet or exceed (hopefully exceed by far) the amount of analysis he does you shouldn't be buying individual stocks. Investing is very qualitative not just quantitative. If it was only quantitative it truly would be completely efficient.

JayGatsby

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Re: Blue Chip Stock Investing curiosity/question
« Reply #17 on: December 31, 2014, 08:26:51 AM »
Investing is very qualitative not just quantitative. If it was only quantitative it truly would be completely efficient.

Bingo. A very difficult/daunting thing to learn with investing. How do you figure out the future growth potential of a company? It's a qualitative call.

innerscorecard

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Re: Blue Chip Stock Investing curiosity/question
« Reply #18 on: December 31, 2014, 08:30:03 AM »
Investing is very qualitative not just quantitative. If it was only quantitative it truly would be completely efficient.

Bingo. A very difficult/daunting thing to learn with investing. How do you figure out the future growth potential of a company? It's a qualitative call.

And yet you can't ignore the quantitative side too, like many investors who buy stocks just because "I always see lines at Chipotle" or "everyone I know uses Facebook." (Well, actually, that's a bad example, because those are examples of bad qualitative judgments, not good ones. - a better example may be "Tesla has great technology, branding, and execution, and therefore it must be a good buy." But you must look at valuation as well.)

And then there's market psychology too, the third complicating factor. That's why it's hard and the rewards for beating the market are so great. As Charlie Munger once said, "It's not supposed to be easy. Anyone who finds it easy is stupid." But the miracle of low-cost funds is that it ironically is quite easy to simple match the market by doing zero work.

Silverado

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Re: Blue Chip Stock Investing curiosity/question
« Reply #19 on: December 31, 2014, 12:42:22 PM »
If those stocks sell at those multiples, that means an  huge number of traders and analysts (with PhDs, supercomputers and $100,000+ bonuses) have poured over every detail of those companies (including information you can't access) and decided that's what they're worth right now. So without looking at a single number I'd confidently say they are exactly equally good to invest in. One will outperform the other, but right now we cannot know which.

How do you figure your six lines in excel will reveal something these people haven't seen?

What baffles me is how that today those 'super minds' will say the business has some value which equals a price. But tomorrow those same minds might say 5% higher or lower. What could be different about the company in a day ( scandals and such notwithstanding)? There are some market type considerations into those prices which have very little to do with the actual company. Not being able to get that is what makes indexing easier to have under a pillow to me.

LordSquidworth

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Re: Blue Chip Stock Investing curiosity/question
« Reply #20 on: December 31, 2014, 04:02:29 PM »
If those stocks sell at those multiples, that means an  huge number of traders and analysts (with PhDs, supercomputers and $100,000+ bonuses) have poured over every detail of those companies (including information you can't access) and decided that's what they're worth right now. So without looking at a single number I'd confidently say they are exactly equally good to invest in. One will outperform the other, but right now we cannot know which.

How do you figure your six lines in excel will reveal something these people haven't seen?

What baffles me is how that today those 'super minds' will say the business has some value which equals a price. But tomorrow those same minds might say 5% higher or lower. What could be different about the company in a day ( scandals and such notwithstanding)? There are some market type considerations into those prices which have very little to do with the actual company. Not being able to get that is what makes indexing easier to have under a pillow to me.

Analyists?

Those guys are useless.

Majority of successful investors I've studied don't keep analyists on staff. Many start, then realize they're a waste of money, and drop them.

clifp

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Re: Blue Chip Stock Investing curiosity/question
« Reply #21 on: December 31, 2014, 06:28:13 PM »
While Scandium and I vociferously disagree on some things (see my thread on why some sophisticated investors shouldn't index), I agree with him or her here that the efficient market hypothesis should be starting point for your analysis. You won't get good results by doing very superficial analysis that is only a few ratios.

The ABSOLUTE minimum (and that's really pushing it) you should do is the level of analysis that Jason Fieber on Dividend Mantra does. That's an example of an individual investor who does somewhat adequate research on blue-chip dividend-paying stocks. If you can't meet or exceed (hopefully exceed by far) the amount of analysis he does you shouldn't be buying individual stocks. Investing is very qualitative not just quantitative. If it was only quantitative it truly would be completely efficient.

I don't think that it has to be or even should be an all or nothing proposition all individual stock vs all index. For a new young investor you should max out your 401K/tax deferred, establish you emergency fun, save for down payment....  Let say after that being a good Mustachian you still have $10,000 or maybe even 20,000 left over take half or 75% and stick it in index funds. If that still leaves you with $2,000 to $5,000 to buy 1-3 individual stocks a year.  I think there is much to recommend doing so. 

At the end of the day, it doesn't really matter if the OP buys JNJ or PG.  I'm not a big fan of the efficient market theory, but even I will concede that is most likely to apply to to mega blue chip like JNJ or PG.  It is very unlikely that JNJ will double in price in the next 3 years, while P&G gets cut in 1/2 or vice versa.  (baring some unforseen event like they poison their customers). More likely one will go up 20% and the other 25%$ or 30% and on $2,000 purchase that's a $100 or $200 hardly material in the big picture.   I think there is a limit to what you can learn about stock investing without actually getting your feet wet and buying stocks.

I think there several reasons to encourage people who are interested to buy individual stocks with a portion of their investment money

A. Increased saving.  I think for many of us it is easier to not buy a toy, or an expensive vacation if we are using the money to buy ownership in an individual company (i.e. stock) than a dull mutual fund.
B. Greater psychological rewards. If I buy 100 shares of A at $25, B at $35, and C $40 and at the end of the year the A is $45, B is $30, and D is $35. I get real excited about my brilliant purchase of A. I'll sell B and C and get my tax loss but be happy for $1,000 profit.   I'd rather have this situation then buy $10,000 in VTI and seeing it go to $11,000 or even $11,100.
C.  Most importantly being able to value stock independently of what Mr. Market tells you they are worth is very valuable skill.  This is especially true and market heights and market bottoms.

Reading retirement boards both in the 2000-2002 bear markets and especially in the 2008/9 crash. I was struck by the difference in behavior and outlook between strictly index investors and the individual stock purchasers.   Say you are closing in on retirement with $600K (400K, stock 200K bonds) at the beginning of 2008.  By Jan 2009 when it is time to do your rebalancing you have $240k in each.  First its hard to to lose a couple years salary and many years saving. But it is especially hard to have the discipline to sell the bonds fund which have been going up and buy the stock fund which continue to go down ever day.  Some people did, but plenty of index investor said no I'm going wait until the market settles down before buying in.  Some are still waiting.

In contrast many/most of the individual  stock pickers were excited about the bargains in Apple, or Realty Income, or Berkshire Hathaway etc.  How did we know they were bargains?  Precisely because we asked the exact same questions as the OP is JNJ with P/E of 17 a dividend yield of 2.67 and Debt ration of 18% and better deal than PG with P/E of 25 dividend of 2.75 and Debt of 29. When the P/E for both stock got down to 11-12 in 2009 and the dividend yields approach 4% the answer is both were bargain.   Even if you ultimately decide screw it I can't decide which is the better bargain and I'll buy VTI, there is real value in  fundamental understanding of what you are buying.

It was easier for the 65-70 years old guys who had been stock picking for 40 years than myself at 50 to buy at the bottom. It was easier for me to buy in 2008/9, then it was to have courage to buy after the Oct 87 crash. Frankly the only way you have 25 years experience in the stock market is to start early.  Even if you have underperformed the market with 10-20% of your portfolio by a couple percentage for years, avoiding the tech bubble of 2000, and not selling at the bottom in 2008/9 is worth a ton.

innerscorecard

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Re: Blue Chip Stock Investing curiosity/question
« Reply #22 on: December 31, 2014, 06:45:08 PM »
Fantastic points. You're absolutely right that it's better to simply get started than to think you know it all. And the best way is to probably start off picking stocks with only a small portion of your wealth.

Experience really is a great teacher, and is invaluable. When I first read the Intelligent Investor in the first week of college, it seemed to make sense but truthfully went in one year and out the other. I was so bored I couldn't actually read the whole thing. Now in my reading this year every sentence seems to speak volumes and be worthy of re-reading multiple times.