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Discounted Blue Chip Stocks - Investing Strategy

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When it comes to the stock market, sometimes you might hear the term "discounted blue chip stocks" mentioned.

This article will explain what that term means and offer a specific investing strategy for it.

 

What Are Blue Chip Stocks?

Blue-chip stocks represent shares of well-established companies that are financially sound and have a history of stable earnings. These companies are typically leaders in their respective industries.

Some people think of blue chip stocks as being those that are listed on the major stock indices, such as the S&P 500.

Others might define blue chip stocks on how big they are. Specifically, any company whose market valuation is at least $10 billion might be considered a blue chip stock.

 

Why Does it Matter if Blue Chip Stocks Are Discounted?

Simply put, if a blue chip stock is discounted, it may offer an opportunity to profit. It a type of investing strategy that falls in the camp of investing in undervalued stocks.

Blue chip stocks have a track record of strength, so if they are discounted in any way from their normal or fair value, an investor might be able to benefit from buying the stock and holding it until the stock price returns to its fair value.

 

How Do You Quantify the Discount on a Blue Chip Stock?

There are lots of ways to measure the value of a blue chip stock, and in turn, whether its current stock price is discounted from that value or not.

A really simple way to do it is simply to see how the current stock price compares to the stock's 52-week high. If, for example, the stock is trading 40% below its 52-week high, that could be seen as being discounted, as the price might eventually get back to its previous highs.

Here's a video where we talk more about a Discounted Blue Chip Stocks investing strategy:

 

How Do You Find Discounted Blue Chip Stocks?

You can find them by using our Undervalue Blue Chips scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find discounted blue chip stocks.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock profiles manually to find blue chip stocks that are discounted.

 

 

Example of a Discounted Blue Chip Investing Strategy

For this example of a Discounted Blue Chip investing strategy, we're going to look for stocks that have prices at least 30% below their 52-week high. We'll plan to hold them for up to a year.

Our research suggests this simple strategy might have a track record of success.

 

Entry for the Discounted Blue Chip Strategy

The entry for this Discounted Blue Chip strategy will be as follows:

The entry criterion for our Discounted Blue Chip Strategy investing strategy is very simple.

Exit for the Discounted Blue Chip Strategy

There are a lot of possibilities here for the exit.

For any given investing strategy, it can be helpful to define two different criteria for the exit: a profit target and a time limit.

Not everyone sets exit criteria for a long-term investment, and that's totally fine. Ultimately, you are in charge of your investments, and you can manage them any way you want. But for the purposes of this investing strategy example, we will define them:

 

1. Profit Target

We will set a profit target that would reflect a 30% gain if the position were to be sold at that price.

In other words, we will take the price we paid for the stock at entry, multiply it by 1.3 (which effectively adds 30%), and use that to set up a sell limit order as a profit target.

If the sell limit order gets filled before the time limit is reached, then our investment is complete, and we will have realized a 30% return on investment.

2. Time Limit

We will set the time limit as one year. If the stock has not hit the profit target within one year of the date of stock purchase, then we can close the trade manually at the stock's prevailing price.

 

How Well Do Discounted Blue Chip Investments Actually Work?

The idea of a discounted blue chip investing strategy sounds nice to many people because it offers a clear, easy-to-understand way to find an investment idea.

But does it actually work? Can traders indeed generate profits from buying discounted blue chip stocks?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that investments in discounted blue chips are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary discounted blue chip strategy we created has performed historically according to backtests:

 

 

Anyone who signs up for our stock scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Blue Chips

You can contact us any time if you would like to ask any questions about blue chip stocks or anything else related to the stock market.