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Motilal Oswal defines a “Bruised Blue Chip” as a stock whose price has, at any time over 10 years, fallen by 50% or more from its five-year high. The brokerage encourages investors to buy stocks that have strong fundamentals and a solid market presence, but are experiencing a temporary setback due to various factors.
For example, Bharti Airtel, after facing significant competition from Reliance Jio’s cheaper data plans, successfully turned around through strategic network investments, acquisitions, cost-cutting initiatives, and a focus on premium subscribers. While there was a 25% decline in Airtel’s wireless revenue and a 57% drop in its wireless EBITDA from FY16 to FY19, it started seeing strong financial growth and a 4.3X increase in market cap since FY21.
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Why invest in Bruised Blue Chips
There are three reasons Bruised Blue Chips could be attractive investments, according to Motilal Oswal:
1. Opportunity to build large positions
When a blue chip stock is down 50% or more from its five-year high, it allows investors to buy into a premium stock at a significantly lower price — assuming the company’s fundamentals remain solid.
2. Attractive returns
Buying these stocks at a discount gives the potential for significant returns if the stock recovers and rises back to its previous highs. It’s a chance to get in on a stock at a bargain price, with the potential for a big upside.
3. Asymmetric payoff
The risk is often limited because the stock has already fallen so much. If the stock starts to recover, the potential rewards far outweigh the risks, offering outsized returns relative to the initial investment.
What causes bruising
According to Motilal Oswal, the reason why blue-chip stocks get bruised can be due to external or internal factors:
1. Stock market-related
Sometimes, large-scale events like a recession or financial crisis can cause a broad market sell-off, dragging down even the strongest companies. The stock price might fall sharply in such cases, but the company’s fundamentals may remain unaffected.
2. Economic or sector-specific factors
Economic slowdowns or changes within certain sectors, such as rising competition or new regulations, can also lead to price declines for blue-chip stocks.
3. Internal company issues
Issues within the company itself, like poor management decisions or failed business strategies, can lead to a drop in stock price.
How to invest in Bruised Blue Chips
Investing in bruised blue chips requires a smart, patient approach.
1. Create a watchlist
Start by identifying strong, large-cap companies that could potentially be “bruised.” Track these stocks to spot any significant price drops.
2. Understand the reason for the drop
It’s important to figure out why the stock price has fallen. Is it due to temporary issues, or are there deeper, more structural problems? Understanding this will help you decide if the company can bounce back.
3. Wait for signs of recovery
Look for signals that the company is on the path to recovery, such as improved financials, better management, or positive industry developments.
4. Focus on attractive valuations
Buy when the stock is undervalued — typically, you’ll want a price-to-book ratio of under 2x. This ensures you’re getting in at a good value, with room for growth.
5. Diversify
Don’t put all your eggs in one basket. Build a portfolio of bruised blue chips to spread out the risk and increase your chances of success.
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