Criteria of Blue Chip Stocks

By definition, blue chip stocks are stocks that representing companies with the following characteristics: 1. The company is large, 2. Have a good reputation and the name (of the company) is well known to the public, 3. Have a good financial performance, 4. Usually is the leader of its industry, and 5. The trading volume (of the stock in the market) is liquid.

In IDX, some investors think that blue chip stocks are stocks that are components of LQ45 Index (an index that represents the movement of the most liquid stocks in the market, and the number of stocks is forty-five). But the fact is, most of LQ45 stocks are blue chips, but not all of them. Because a stock can defined as a blue chip if it fulfills the above criteria, and not only because it was liquid.

And based on my knowledge and experience, here are the details of the criteria:

1. The company is big (or large, or whatever). There are three measurements to define the size of a company, ie market capitalization (or market cap), assets, and net assets (equity). Because market cap is only reflecting the price of the company in the market and not the real value of the company, then you have to order the measurements as follows: First, look at its equity, then its assets, and lastly, its market cap.

2. Reputable and well-known to the public. A company would be reputable if it can contribute (with a real contribution) to the people. For example, Indofood (INDF), because its main product, Indomie instant noodle, has give many benefit to many people like the owners of groceries, light food cafe, or college students that have no money to buy any other food (Indomie is so cheap but delicious). And the name of ‘Indofood’, of course everybody knows it.

3. Have a good and consistent financial performance in the long term, not only today but also in the past, at least five years back. I like company with a big return on equity (ROE), and small debts, and the equity it self is keep growing.

4. Usually the leader of its industry, and the products became market leaders (‘usually’ means not necessarily). For example, Unilever Indonesia (UNVR), because its products, like soap, shampoo, etc, become market leaders of their respective fields.

5. The stock is liquid. Of course, liquidity of a stock is a subjective figure, but I think, for the size of Indonesian stock market, a stock can be considered as liquid if its daily trading value is about Rp5 billion (about US$ 500 thousand). So for a stock that is traded at Rp1,000 per share, then the transaction volume is must be above 5 million shares per day. Less than that, then it is not a blue chip stock anymore.

So, can you mention at least five blue chip stocks of your own, based on the above criteria?