The Blue Chip Growth Portfolio

Key Points

• Blue Chip Growth Stocks will hold higher investor expectations and in most cases the market can price these names at a premium. Many of these companies usually grab the headlines as revenue and earnings growth are carefully watched.
• The title of Blue Chip Growth is rightfully earned due to historical performance and investors feeling a sense of conviction that the company’s stellar performance can continue into the future after diligent research.
• The best way to describe a Blue Chip Growth Company is the fine balance between remaining a financially stable juggernaut but yet also aligning itself to continue to grow sustainably above the average market rate on a Year over Year(YOY) basis.
• At GenVest, we prefer to use the term “Quality Growth”. The phrase is reserved for best in bred companies where superior business values, financials,  proven leadership and innovation stemming from excellent culture occur.
• As an investor becomes more comfortable and their risk tolerance increases, building positions in quality growth businesses across different sectors when they are trading at a steep discount can handsomely reward investors over the long-term.
• A Blue Chip Growth Portfolio can be more volatile(price swings) in comparison to other investment funds.

What Does the Phrase Blue Chip Growth Mean When Investing?

The standard definition of a blue chip stock is often associated with terms such as “financially sound”, “industry leader”, and “robust cash flow”. While this is true, it can lead newer investors to allocate their portfolio into companies fitting these characteristics without realizing their true opportunity cost over the long-term. Make no mistake, owning companies like Procter and Gamble, McDonalds, or Coca Cola can certainly have a place in a portfolio and almost always will.

When it comes to Blue Chip Growth the focus is on best in bred companies that should continue to be consistent with revenue and earnings growth Year over Year(YOY) due to long-term tailwinds and hopefully outperform a standard benchmark like the S&P 500.

While investing in financially stable companies is wise and encouraged, Genvest looks to emphasize the importance of being able to find consistent growth in Blue Chip names. Creating a Blue Chip Portfolio does not always mean you need to forgo companies with attractive growth opportunities. 

As an investor, you can still find financially stable companies with the potential for higher growth while still allowing you to feel secure about your investments.

The Common Mistake When Selecting Names for A Blue Chip Growth Portfolio

Investors can be quick to gravitate towards very high paying dividend stocks thinking this translates to a Blue Chip Growth Stock. However, some of these companies might elect to pay a higher portion of their earnings out as dividends as opposed to reinvesting into future projects in order to grow the company. 

Dividends should certainly be appreciated by investors and What Dividends Tell Investors can also help them with their investment decisions. 

A company paying out 75% of their earnings as dividends could be sacrificing growth or signaling that growth opportunities for the business are limited. This is not the be all but can be something worth considering. 

There are several companies that, while paying a dividend, also set aside the appropriate retained earnings to grow the company with a focus on grabbing market share with a new product or service through R&D. 

You can see this by looking at the dividend payout ratio for a company to get an idea of what percentage of earnings are going back into the company. The ratio is the amount being paid out to shareholders vs. reinvested into the business. It is key to find a healthy balance where shareholders are rewarded but so are growth opportunities.

Blue Chip as Quality Growth 

While this may seem like a contradiction, do not become fixed on the idea of growth being directly associated with Very High Risk. Profitless high growth companies YES! Those names are Risky but Blue Chip Growth is different.  

At Genvest, we prefer to use the term “Quality Growth” when discussing companies for a Blue Chip Growth Portfolio. We also want you to know that growth is not always directly correlated with technology companies as often displayed in investment community commentary.

Likewise, just because a company pays an attractive dividend does not mean it should not be classified as a growth stock as well. Companies such as Apple, Microsoft, Alphabet, Lululemon Athletica, McCormick & Company, UnitedHealth Group, and Costco are a combination of dividend/ non-dividend paying stocks across various sectors of the economy. 

Building a Blue Chip Portfolio inclusive of growth can fully be achieved while still maintaining diversification and might already include various companies that are already familiar to you. This is because the Best Stocks an Investor Might Already Know It. 

Know the Business and Its Long-Term Growth Outlook

Understanding the future outlook of a business is perhaps the most critical due diligence one must perform when creating a Blue Chip Growth Portfolio. It is not only critical for you to know whether or not the company is financially sound, but to also research the company’s business strategy and how they are managing their product/service portfolio. 

Investing in Leadership is also important as well, every winning team is composed of strong leaders. 

Revenue growth is traditionally rooted in a company’s ability to expose itself into rapidly expanding industries or by leveraging their expertise to provide a superior product/service in comparison to their competitors. Likewise, their ability to translate the growing revenue into earnings growth also becomes important. This can show how efficiently the company operates.  

One key principle to always consider when it comes to free-markets is the power of the consumer. If you are fond of a company’s products or services, chances are you will most likely find the company interesting as well and might want to know more about products/services currently coming through their pipeline. 

This should give you all the more reason to invest in a company fitting the above criteria. However, one important note to take here, make sure a company is growing sustainably and not venturing into an industry far outside their expertise. 

The switching costs in some instances can potentially be harmful to the future outlook of the company and you might wonder why they are going from their specialized business into another sector if it does not make sense. 

In addition, investors should be wary of companies taking on too much debt to grow simply through acquisition, as this is not always sustainable. 

A Blue Chip Growth Portfolio is Great For Investors With Less Starting Cash 

Developing a Blue Chip Growth Portfolio is best suited for investors with a lower amount of financial capital. This will often range from $1K-$250K as you will see growth of principal compound at a higher rate as opposed to investing in low growth companies or bonds. 

It is important to note a Blue Chip Growth Portfolio can experience more volatile price swings but holds the potential to outperform standard benchmarks over the long-run. 

As your investment grows and the value of the portfolio increases over the course of many years, you can then begin to consider other investment strategies such as The Dividend Growth Portfolio which can still be composed of growth names but holds more exposure to stable company names paying attractive dividends potentially resulting in less volatility for the portfolio.

Nervous to Start?

Constructing a Blue Chip Growth Portfolio might seem daunting for an investor who is not yet familiar with enough companies to ensure they are diversified appropriately. This is understandable, but it should not stop you from considering one as you could resort to the option of putting your cash into various Blue Chip Growth Funds whether they be Active vs. Passive in terms of management. 

This is an easier solution for investors who seek growth but are still trying to figure out which companies they would like to invest in because they are still analyzing their business outlook and current financials. 

Part of the due diligence before purchasing individual stocks is a process referred to as Equity Valuation. This is where an investor analyzes the value of the company and at what price they would consider the company trading at a discount.

Conclusion

When it comes to picking an individual stock, research is critical and an investor must feel a sense of conviction that they bought shares at an attractive price while the business fundamentals and long-term outlook remain in strong shape. 

Picking an individual stock can be highly rewarding since it is not tied to a basket of stocks like an ETF allowing it to have the chance to vastly outperform a standard benchmark like the S&P 500. However, the potential for it to let’s say be a dud on its own is also possible because it will not have the support of friends(other stocks) like in an ETF to balance things out.

Building a portfolio of Quality Growth Companies is a process that takes time and it is imperative an investor eventually becomes and remains diversified across different sectors with their holdings to keep a well balanced portfolio for risk based purposes.

Likewise, you could even get an idea of what Quality Growth companies are out there just by looking at the holdings of some professionally managed funds. This is readily available online when one searches for it.

Popular Blue Chip Growth Funds

1. T. Rowe Price Blue Chip Growth Fund(TRBCX)
2. Fidelity Blue Chip Growth Fund(FBGRX)
3. J.P. Morgan Large Cap Growth Fund(OLGAX)
4. Vanguard Mega Cap Growth ETF(MGK)