Value Identification Basics
Stock market analysis is generally conducted through two central disciplines: fundamental and technical. Fundamental analysis has two main subsets: the quantitative and the qualitative.
Quantitative generally refers to numbers, things that can be measured such as earnings, dividends, cash flow, payout, debt, and so forth. Qualitative generally refers to intangibles, characteristics that can’t necessarily be measured but nonetheless are important; for example, name recognition such as a company’s brand, management expertise, commitment to research and development, industry cycles, and so forth.
Technical analysis is considered by many to be the polar opposite of fundamental analysis. Whereas fundamental analysis involves analyzing the economic characteristics of a company in order to estimate its value, technicians are primarily interested in price movements because the fundamentals, they believe, have been fully factored into the price. Another definition would be the study of supply and demand in a stock or market to determine what direction, or trend, will continue in the future.
Generally, but not always, analysts tend to favor one discipline over the other. For many practitioners, there is simply no way for the two disciplines to co-exist. On the contrary, our approach is based on a combination of the two disciplines, which we call a fundamental approach to technical analysis. The Criteria for Select Blue Chip Stocks is how we identify fundamental quality, or what to buy. Our Profiles of Value, the study and identification of the historically repetitive patterns of undervalue and overvalue areas of dividend- yield, is how we identify value, or when to buy, sell, or hold.
Criteria for Select Blue Chips
The IQ Trends register of Select Blue Chips is an elite representation of the highest quality and most prosperous corporations in the country. According to our method, a stock will achieve the designation of Select Blue Chip after it has met at least five of the six following qualifications and may remain with four criterion.
- Dividend increases 5 times in the last 12 years
- S&P Quality Ranking in the “A” category
- At least 5,000,000 shares outstanding
- At least 80 institutional investors
- At least 25 years of uninterrupted dividends
- Earnings improved in at least 7 of the last 12 years.
The reason the term blue chip is reserved for only the highest quality stocks is that blue chip companies have a reputation for dependability as well as offering the best potential for increasing shareholder value through dividend growth and capital gains. There are at least 15,000 publicly traded companies in the U.S. financial markets. Common sense suggests that not all of them are blue chip stocks, or even companies that are worthy of investment consideration for that matter.
Although many blue chip companies are household names, an equal number, if not more, are not. There are also many stocks that are household names, but they are far from being blue chips. The point is it is important to have a mechanism or filter to eliminate the pretenders from the contenders.
Since 1966 we have used six criterions, which we call the Criteria for Select Blue Chips (our designation for the highest-quality blue chip stocks) , as a starting place for our investment considerations. When a stock has passed this filter for its qualitative characteristics, we then analyze it further to determine its historically repetitive areas of undervalued and overvalued dividend yield. At first glance these six criterions appear relatively simple, which they are; no rocket science here. When combined into one fundamental filter however, it effectively eliminates approximately 98% percent of the domestic publicly traded universe of stocks. To put that into further perspective, of the roughly 15,000 publicly traded companies in the U.S. markets, only 350 companies meet this criteria, and of those 350 we can establish clear clear-cut dividend-yield profiles for only 250 - 260 companies.
Need More? Blue Chip Criterion Detailed Explanations