I have always admired large blue chip stocks. They are tremendous organizations, full of executive talent and with tentacles spread out all over the world. Doors open for their CEOs wherever they go, from the corridors of power in New York or Washington to overseas capitals such as Tokyo or London. But for investors, these traditional blue chips have two drawbacks.
First, these huge organizations with annual revenues of hundreds of billions of dollars have a hard time growing very fast; 3%-5% revenue growth is seen as a banner year.
It is not just that they are so big but that they are largely focused on mature markets in the U.S., Japan and Europe. In my research, most of these traditional blue chips have less than 15% of their revenue coming from more dynamic markets in Asia and emerging markets.
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Second, like aircraft carriers on the high seas, blue chip companies are very hard to maneuver and tend to make changes in direction or strategy very slowly if at all.
This puts these giants at a distinct disadvantage when competing with smaller more nimble rivals.
So I recommend that you have in your global portfolio a blend of traditional blue chips with emerging blue chips as emerging blue chips offer a number of competitive advantages.
The best way to describe an emerging blue chip is to contrast it with traditional blue chips.
Blue chip companies are huge, global, stable, mature companies based in Western markets with slow steady sales and profit growth plus decent dividends. One famous blue chip is Johnson & Johnson (JNJ). Its international sales have tripled over the past decade but its stock has performed poorly.
Another example is giant Procter & Gamble (PG). P&G’s average annual growth over the last five years is less than 2% and it is losing market share in a majority of its businesses.
While having blue chips stocks like J&J and Procter & Gamble in your portfolio may help you protect your wealth, you need to think a bit more boldly to put some sizzle into your portfolio and build real wealth.
You do this by following John Train’s advice in his book Preserving Capital:
You do this by investing in emerging blue chips that are big companies headquartered in emerging market countries and offering products and services that directly compete with traditional blue chips.
Keep in mind that these emerging blue chips are substantial companies - the average market value of top 30 emerging blue chip consumer companies is $27 billion.
These emerging blue chips profit handsomely from the following powerful advantages:
Reasons to Invest in Emerging Blue Chips
- Reason #1: Home court advantage and government backing equals influence on regulatory issues
- Reason #2: Local inside knowledge in booming consumer markets = higher growth
- Reason #3: Lower labor and manufacturing costs & economies of scale = bigger profits
- Reason #4: Earlier stage of growth cycle, focused on fast growing consumer markets = sustainable high growth
- Reason #5: Emerging blue chip stocks are off the radar screen of Wall Street = opportunity for value prices
- Reason #6: Great balance sheets, 3%-4% dividends, and the same talented management of traditional blue chips
- Reason #7: Operate in countries that avoid the high debt, high deficits and poor demographics that plague many more developed countries
Here are a few ideas if you are interested in getting going investing in emerging blue chips.
The Emerging Markets Consumer Titans exchange-traded fund (ECON) is an easy way to invest through a basket of about 30 stocks of consumer goods and consumer services companies in emerging markets. The largest country allocations in this ETF are Mexico, Brazil, and South Africa, India, Chile, Malaysia, China, Russia and Colombia.
Two emerging market blue chip stocks that you may wish to take a close look at are China’s Alibaba (BABA) and Tata Motors (TTM).
BABA is an e-commerce giant and showing strong growth across the board. Its active customers over the past year increased by 25 million to 601 million, and in the most recently reported quarter, core commerce sales jumped 56% year over year. As a way of comparison, Amazon’s (AMZN) revenue growth rate has slowed considerably. And on top of this, Bloomberg reported that China just surpassed the U.S. in retail sales by hitting $5.64 trillion compared to the U.S.’s $5.53 trillion!
Another emerging blue chip that I refer to as the “Ford of India” - Tata Motors (TTM) – is an interesting turnaround value play. It is struggling after weak sales and Brexit issues affecting its Jaguar and Land Rover brands. In fact, it just posted a significant loss.
However, in the last year, its stock has gone from 28 to 13 and I expect deep value investors will pounce given its long-term outlook in a country that’s growing at a 7% plus clip.
My advice is to carefully select some emerging blue chips to put some sizzle in your portfolio.
Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor), can help you create a portfolio of strong emerging markets stocks. To learn more, click here.
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*This post has been updated from an original version.
