What Are the Best Blue Chip Stocks?
Blue chip tech stocks are the “royal flush” of investing. They are the best you can have in the technology industry. Do you notice my subtle reference to poker here? That’s because in Wall Street folklore, the popular moniker “blue chip stocks” originates from this gambling sport—implying blue chips to be the most valuable in the game.
Enthusiasts argue that poker is a game of skill more than a game of luck. It could be true, because after two dozen hands, it may not matter what’s in your hand but how disciplined you are and how masterfully you bluff.
That, my friends, is also a doctrine of “trading”. The focus is not what stocks you buy, rather how well you play your opponent—Mr. Market. But “investing” works on the contrary. In investing, no matter what tricks the market plays, if you have a royal flush in your hand, you can win the pot.
On the same lines, blue chip stocks are highly valued, and for a reason. These companies have been around for years, have built a reputation, and are recognized by all and sundry.
But there’s a pitfall you must avoid when looking for these stocks. More often than not, companies with a large capitalization are instantaneously labelled blue chips. But bear in mind that a large capitalization alone will not automatically make them great investments.
The truth is that this overused term, “blue chip stocks,” has turned stale. So I try to look past popularity and market cap. This is why I bypass most blue chip stocks and instead hunt for “RED” chip stocks.
Forget Blue, Look for RED Chips
I’ve created a little screener of my own for picking these RED chips—RED being an acronym for the three fundamental metrics that I like to check for in blue chip tech stocks.
The “R” in RED stands for Return on Equity. Like equity in your house, equity in a business defines your ownership in it. So, return on equity (ROE) is what you earn on your ownership. It’s simple to infer that the higher a company is earning on its equity, the more it can return to you.
As a rule of thumb, I like to pick businesses that deliver ROEs in excess of 10%.
Next, the “E” is for earnings. A company with consistent earnings is one with a durable advantage. Consider this to be synonymous with having a monopoly-like leverage. Such a company can keep making money through the economy’s ups and downs and doesn’t have to worry much about competition cutting into its profits.
Contrast this with a company that has no distinctive durability or no brand appeal. Such a business has to struggle to keep its place in the market. This is why you’ll see wide swings in its earnings. So consistency is the key, and I’m looking for companies with, not quarters, but years of consistent earnings.
Lastly, the “D” represents dividend aristocrats. These are the companies boasting a long and consistent history of healthy dividend payouts. They pay dividends because they know they can continue doing so. And that is only possible if they have steady influx of cash.
Top Blue Chip Stocks in the Tech Sector
On a cursory look, you may feel that a handful of blue chip stocks can easily meet the three criteria. But here lies the real problem. It is not a level playing field for every sector.
Finding such companies, particularly in the tech sector, can be challenging. That’s because this sector is usually considered procyclical—which means its performance fluctuates with the economy. If the economy is doing well, the sector outperforms, and vice versa. So a recession-proof “technology” company is as rare as hen’s teeth.
Nonetheless, there are a bunch of tech companies that hold, what investment-maven Warren Buffett likes to call, an “economic moat.” Simply put; these blue chip tech stocks have a unique competitive edge over peers. That’s because each one of them has one special distinguishing factor that sets it apart.
So, ladies and gentlemen, without further ado, please prick up your ears for the three best blue chip tech stocks 2017.
|Market Cap||Year-to-Date Return||10-Year Return|
|Apple Inc. (NASDAQ:AAPL)||$740.2 billion||22%||1080%|
|Microsoft Corporation (NASDAQ:MSFT)||$503.8 billion||5.16%||190%|
|International Business Machines Corp. (NYSE:IBM)||$160.3 billion||2.95%||121%|
1. Apple Stock (NASDAQ:AAPL)
One trillion dollars! I can’t even begin to count the zeros in there! Yes, Apple Inc. (NASDAQ:AAPL) is gunning for a trillion-dollar valuation. One can’t imagine a list of best blue chip tech stocks without a mention of world’s most valuable company. But like I said, I’m looking for more than just market cap.
So what is its economic moat, you ask? Not one, but two!
First is Apple’s operating system—”iOS”—which has created a unique ecosystem of its own, where all of the Apple products, including “iPhones,” “iPads,” “Mac” computers, “Apple TVs,” and “Apple Watches,” interconnect and communicate with each other. Complementing these products are the iOS services like “iTunes,” “iCloud,” and “Apple Pay,” that bolster the iOS.
The distinctive factor that sets iOS apart from Alphabet‘s “Android” is that it’s neither cheap nor does it allow third-party intruders into the system. This means iOS remains unique to Apple and continues to mint money for it.
The second moat is Apple’s premium brand appeal. The high-end Apple products are owned by affluent aesthetes who love the minimalist Apple designs and enjoy being part of its fancy ecosystem. That reason alone allows Apple to sell on high margins and, in turn, continue to build the gargantuan pile of money in its bank account.
Now, let’s see if this best blue chip tech stock also makes for an excellent RED chip.
Yes, it does! An ROE of 34.7%, a history of robust earnings, and a healthy dividend stream for a yield of 1.57% make Apple stock one of the best blue chip tech stocks to watch.x
Better yet; the lustrous stock performance is a delicious icing on the cake.
Chart courtesy of StockCharts.com
2. International Business Machines Stock (NYSE:IBM)
No list of blue chip stocks can ever be complete without the “big blue.” International Business Machines Corp. (NYSE:IBM) is the century-old business renowned for its cutting edge technology that has always kept it ahead of the technology curve. And this is exactly what its economic moat is.
While one could write a book on the bajillion products and services it has created and sold, I’m bullish on three very intriguing future technologies that it is working on—IBM “Watson” and its artificial intelligence (AI), the Bitcoin technology-based IBM Blockchain, and the first-of-their-kind, soon-to-be commercially sold IBM quantum computers.
All three of these look to be promising future cash cows for IBM. Yes, I’m calling this long-established value stock a growth play now. And here’s a bonus for you. IBM is also a Buffett stock because it is one of the best managed businesses that delivers incredible returns to IBM stockholders.
Chart courtesy of StockCharts.com
Believe it or not, but IBM stock returns a whopping 74% on equity, boasts a century-long history of both steady earnings and dividends, and offers a current dividend yield of 3.22%. All of these metrics check on the RED chip criteria, making IBM stock one of the best blue chip tech stocks in 2017.
3. Microsoft Stock (NASDAQ:MSFT)
This tech behemoth has kept its spot on the center stage since, what seems like, the beginning of times. Microsoft Corporation (NASDAQ:MSFT) is knee-deep in nearly all technology ventures that you can think of. From computer software to technology hardware, from virtual reality to artificial intelligence, from native applications to cloud computing, Microsoft has left no stones unturned to maintain its profitability through the economy’s ups and downs.
Yet, its economic moat is something special—two of its software that bring in a steady stream of cash every year. First is “Microsoft Office,” the ubiquitous office suite that is used by virtually ever single business in the world. And that’s exactly where a lot of Microsoft’s money comes from—that is, through its commercial licensing. Second is Microsoft’s omnipresent operating system, “Windows,” which powers the biggest chunk of the PC market and, likewise, adds to its licensing revenue.
The two software jointly lead the industry with monopolistic power, since none of their close competitors match up to their dominance in the commercial landscape.
Let’s test if MSFT stock makes for a good RED chip stock.
Yes, indeed! Microsoft stock boasts an ROE of 23%, steady earnings, a dividend yield of 2.3%, plus a robust cash pile.
Also note that the stock price performance is no less than stunning, with a steady ascent over the years. I wouldn’t think twice before calling it one of the best blue chip tech stocks to watch in 2017.
Chart courtesy of StockCharts.com
Bottom Line on Best Blue Chip Tech Stocks
If you’re clueless where to hunt for these stocks, a good place to start is the DOW 30. You’ll find the best of the bunch there. Apple, Microsoft and IBM, along with other heavyweights like Intel Corporation (NASDAQ:INTC) and Cisco Systems, Inc. (NASDAQ:CSCO) are some of the best blue chip tech stocks part of the DOW 30.
Next comes the step of shortlisting your picks. A good way to filter them is through my RED chip criteria.
Lastly, look for the right time to buy your pick. Just remember that these stocks are in plain sight of any investor, in which case they’ll usually be trading for fair or over valuation. So the best time to buy them is when the traders are jumping ship in a market correction or behind momentary bad news. That’s when you need to jump in.