Wealth Creation Through Bruised Blue Chips

The 29th Annual Wealth Creation Study (2019-2024) is released and it is all about the potential of investing in "Bruised Blue Chips." These are well-known companies whose stock prices have taken a serious correction in the market. The study points out that while prices of blue chip stocks are high most of the times, snapping up these battered stocks at good prices can lead to nice returns with minimal risk.
Most people think investing means putting money into healthy companies, but going for troubled ones—aka potential turnarounds—is a different game. The biggest worry here is that these companies might not make it, which could lead to permanent losses. As Warren Buffett puts it, “Turnarounds seldom turn around.”
Best way to make turnarounds work? Invest in “Bruised Blue Chips”—big companies with solid histories that are currently facing tough times. And guess what? The potential returns can be pretty sweet, with less chances of them going under.
So, what exactly are blue chips? According to Wikipedia, blue chips are stocks known for their quality, reliability, and ability to profit whether the market's up or down. They typically have a strong track record, are big in terms of market cap, sales, and profits, and lead their industries while being profitable.
For this study, a Bruised Blue Chip is defined as one whose stock price has dropped by 50% or more from its highest point in the past five years.

Why Go for Bruised Blue Chips?
Here are three compelling reasons to think about investing in Bruised Blue Chips:

1 - Golden Chance to buy Blue Chips
Since Bruised Blue Chips are down at least 50% from their highs, it means there’s been a significant drop in their usually high valuations. If the company's fundamentals are still strong, this is a golden opportunity to grab shares in these desirable blue chips.

2 - Sweet Returns and Asymmetric Payoff
Bruised Blue Chips can deliver returns that beat non-Bruised Blue Chips by a long shot. Imagine the stock peaked at INR 100 and dropped to INR 25. The chances of it falling further are slim, but if it bounces back to that high, you’re looking at a 300% gain! Even if it drops by 50%, the upside could still be at least 100% if it recovers to its previous peak.

3 - Minimum Risk of Going Under
In a study covering seven rolling 10-year periods ending in 2018 to 2024, there were 99 Bruised Blue Chips, and every single one is still around today. Investing in these stocks means the risk of permanent loss is super low.

How to Invest in Bruised Blue Chips
To profit from Bruised Blue Chips, best is to buy them when they’re close to their lows after taking a hit. Here’s how to go about it:

1- Make a watchlist of Bruised Blue Chips
2 - Understand why they took a hit 
3 - Await healing triggers - look for out for sector tailwind (external) & change of management (internal)
4 - Buy only if the company’s future looks bright and the valuation is attractive - usually around Price/Book of about 2x

Current Watchlist of Bruised Blue Chips
You can spot Bruised Blue Chips more easily during market dips. Recent corrections in the stock market have offered an opportunity to invest in blue chip stocks at an attractive valuation. Here’s a quick watchlist of 2024 blue chips that are down 30% or more from their five-year highs:

Bruised Blue Chips watchlist 20-24 Current Price
 

Bruised Blue Chips watchlist 20-24  Current Price

Key Takeaways

Bruised Blue Chips = Opportunity: Investing in solid companies that are temporarily undervalued can lead to great returns.