Do Blue Chip Stocks really do better?

do blue chips do better?

25 Aug Do Blue Chip Stocks really do better?

The Straits Times Index (STI) used to comprise 50 stocks. The rule change in 2008 brought the figure down to 30 stocks as we know it today.

I have always wondered what is the impact for a stock to be included or excluded from the STI. Do they turn out better or worse respectively.

There have been a handful of changes in the component stocks since 2008 and I have dug the history to present you the movements of stocks in and out of the STI for the past 8 years:

Date Include Exclude
Sep 2008 Jardine Matheson

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Golden Agri

Thai Bev

Yangzijiang

Mar 2009 ComfortDelGro

SMRT

Yanlord

Keppel Land

Sep 2009 Nil Nil
Mar 2010 CapitaMalls Asia Cosco Corp
Sep 2010 Nil Nil
Mar 2011 Global Logistics Properties SMRT
Sep 2011 Nil Nil
Mar 2012 Nil Nil
Sep 2012 IHH Healthcare NOL
Mar 2013 Thai Bev IHH Healthcare
Jun 2013 to Jun 2015 Nil Nil
Sep 2015 UOL

Yangzijiang

SATS

Jardine Matheson

Jardine Strategic

Olam

Dec 2015 Nil Nil
Mar 2016 CapitaComm Trust Noble
Jun 2016 Nil Nil

Stocks that were excluded and got back into the STI

  • Thai Bev (excluded in Sep 2008 but added back in Mar 2013)
  • Yangzijiang (excluded in Sep 2008 but added back in Sep 2015)

The performance of these stocks were mixed. Thai Bev’s share price has gone up while Yangzijiang’s share price has came down, after both were re-added to the STI. It is more likely Thai Bev’s rise was fueled by the better sales in Chang beer while Yangzijiang is battling the downturn in the shipping industry. Earning an index stock status had little or no bearing to the stock performance.

Thai Bev and Yangzijiang and STI

Stocks that were added after Sep 2008 but were later excluded again

  • Jardine Matheson (included in Sep 2008, excluded in Sep 2015)
  • SMRT (included in Mar 2009, excluded in Mar 2011)
  • IHH Healthcare (included in Sep 2012, excluded in Mar 2013)

The results were also mixed for this group of stocks. SMRT’s price went down while Jardine Matheson’s and IHH Healthcare’s share prices showed no retreat despite being dropped from the STI. We could correlate to certain events such as train breakdowns which led to higher maintenance expenses and lower profits for SMRT. Jardine Matheson, being a huge conglomerate, has her businesses diversified in multi-sectors, and hence more robust even in a tough economy. IHH Healthcare is a big healthcare player and this sector is poised to grow in terms of demand. Again, the exclusion from the STI did not affect some of the stocks, and it is the underlying business trends that probably played a bigger role.

Jardine Matheson and STI

SMRT and STI

IHH Healthcaare and STI

Stocks that were excluded from the STI

  • Yanlord (Mar 2009)
  • Keppel Land (Mar 2009)
  • Cosco Corp (Mar 2010)
  • NOL (Sep 2012)
  • Olam  (Sep 2015)
  • Noble (Mar 2016)

Among the 6 stocks, 4 stocks (Yanlord, Keppel Land, NOL and Olam) saw increases in their share prices while 2 stocks (Cosco Corp and Noble) declined. These 6 stocks are in sectors that are doing poorly now. Property developers are facing oversupply and underwhelming demand. Shipping rates and commodity prices have gone down due to a slower economy. The question is why did Yanlord, Keppel Land, NOL, and Olam still managed to see an increase in their share price? The answer lies in the timing.

Yanlord and Keppel Land were added just after the stock market crashed in 2008. It is very easy to make a profit if you have invested at such low prices.

NOL was acquired and shareholders were offered a price above the prevailing share price. It wasn’t that NOL business fared better. Olam also had a vote of confidence when Temasek Holdings injected more investment capital into the company.

We can find a lot of explanations based on past events and correlations. Nonetheless, we can conclude that a stock is not doomed if it was excluded from the STI.

Yanlord excluded from STI

Keppel Land excluded from STI

Cosco Corp excluded STI

NOL excluded from STI

Olam excluded from STI

Noble excluded from STI

Stocks that were added to the STI

  • Golden Agri (Sep 2008)
  • ComfortDelgro (Mar 2009)
  • CapitaMalls Asia (Mar 2010)
  • GLP (Mar 2011)
  • UOL (Sep 2015)
  • SATS (Sep 2015)

Similarly, the stocks that were added to the STI did not guarantee an increase in share prices. There were 3 stocks (ComfortDelGro, CapitaMalls Asia (delisted), and SATs) that have gone up and there were 3 stocks (Golden Agri, GLP, and UOL) that have gone down, which are in weak sectors of commodities and property development.

Golden Agri included in STI

ComfortDelGro included in STI

CapitaMalls Asia included in STI

GLP included in STI

SATS and UOL included in STI

Conclusion

It is a sign of prestige to be part of the STI component stocks. But getting onto the list does not guarantee the stock will do well. In a similar vein, being booted out of the STI does not mean the stock will underperform. There are no clear patterns.

The stocks performance could better be explained based on the events affecting the sectors that the stocks were in. For example, shipping and commodities were weak sectors, weighing down stocks such as Yangzijiang, Cosco Corp, Olam and Noble. There were also some stocks that were added to the STI just after the Global Financial Crisis in 2008, which proved to be a very low entry prices for most stocks and outperforming the market is almost a given. Market timing in this case played a part.

Bottomline, it is not easy to foretell which stocks would do better. We can only make a judgement call based on the information we have at hand. But definitely, a stock being added to the STI does not simply justify a buy call.



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