Blue-chip companies refers to firms that have a well-known brand and those that have a substantial market share in their industries. Growth stocks, on the other hand, are relatively young companies that are capturing market share. In this article, we will look at the difference between these companies and how to trade them well.
Growth vs. blue-chip stocks
Blue-chips are incumbent companies that have been in the industry for a long time. They are well-known and tend to have reliable revenue and a substantial market share in their industries. Growth companies, on the other hand, are smaller and younger companies that are gaining traction from their users. They tend to be disruptive, have faster revenue growth, and target industries with a vast total addressable market.
General Motors (GM) is a good example of a blue-chip company, while Tesla represents growth firms. GM is a well-known automaker that sells some of the most iconic brands like Chevrolet, GMC, and Cadillac. The company has been in the industry for decades and generated more than $122 billion in revenue in 2020. It is a highly-profitable company that had a net profit of more than $6 billion.
Tesla, on the other hand, is a fast-growing automaker that had more than $30 billion in revenue and $700 million in profits. Yet, Tesla is valued at more than $800 billion while GM has a market capitalization of more than $74 billion.
This discrepancy is simply because GM’s growth has been relatively slow. In fact, its revenue in 2020 was $14 below what it made in 2019 because of coronavirus. In total, its revenue has fallen from more than $140 billion in 2016.
Tesla, on the other hand, has been on a strong growth path. In 2020, its annual revenue grew by almost 30%. In 2016, its revenue was about $7 billion.
There are many well-known blue-chip companies in the United States. Some of the best-known of them are:
- McDonald’s – Fast food restaurant chain
- Berkshire Hathaway – Diversified
- Intel – Technology
- Visa and Mastercard – Payments
- Procter & Gamble – Fast Moving Consumer Goods (FMCG)
These companies are well-known, have dependable revenue growth, and generate high profits. Most of them also pay a regular dividend to their shareholders, and they also buy back a lot of shares.
Growth stock examples
In addition to Tesla, other good examples of growth stocks in the US are:
- CrowdStrike – Cybersecurity
- Roku – Technology/media
- AMD – Technology /chips
- Nio – Automobile
It is worth noting that some traditional blue-chip companies can also be put in the momentum category. Microsoft and Apple are the best examples of this. While these companies are traditional, they have evolved their businesses in recent years. Today, Microsoft’s cloud business is growing at more than 30% every year. Similarly, Apple has a service segment that has grown to more than $15 billion.
Also, unlike most blue-chips, growth stocks don’t pay dividends, and some are not even profitable. They use their income to fund growth. For example, while Amazon is now one of the biggest companies in the world, it made its first profit in 2004.
Trading growth vs. blue-chip stocks
Ideally, there is no major difference between day trading growth and blue-chip stocks. Furthermore, all these companies are listed either at the New York Stock Exchange (NYSE) or the Nasdaq. They also tend to be affected by similar factors like news and earnings.
However, in most cases, growth stocks tend to be better for day traders than blue-chip stocks. There are a few reasons for this.
First, the share prices of some blue-chip stocks tend to have little or no volatility. That’s because most of these companies are not always in the news. For example, a company like Berkshire Hathaway is rare in the news. Other blue-chips like Visa, UnitedHealth, Walgreens, and Walmart rarely deliver new information.
Growth companies, on the other hand, tend to be always in the headlines. Companies like Tesla, Roku, and Nio receive wide attention from the media and analysts. As a day trader, focusing on highly volatile firms is usually a more profitable strategy.
Second, blue-chips are also not significantly volatile because of their ownership structure. Ideally, many of them are mostly owned by large institutional investors who are usually long-term holders. These investors rarely sell their holdings.
Third, while not always the case, the share prices of many blue-chips tend to be relatively high. This is because these firms have been listed for a long time, which has seen their stock prices rise. For example, class A shares of Berkshire trades at more than $300,000. This means that many retail traders usually ignore it. However, some growth stocks like Amazon, Facebook, and Alibaba have seen their share prices soar in recent years.
How to trade growth and blue-chip stocks
As mentioned, trading these companies is always the same. If you have a brokerage account, you just need to conduct a fundamental and technical analysis for the stocks and then buy or short.
In fundamental analysis, you need to look at the latest news and analyst calls about a company. Since you are a day trader, you don’t need to look at detailed information like balance sheets, income statements, and valuation. Only long-term investors should pay attention to those.
In addition to news and analyst calls, you should look at other information like level 2 and time and sales. Level 2 is a dashboard that shows you the overall order flow of a stock. It reveals the number of shares being traded and their bid and ask prices. Time and sales show you the time and number of shares that have been traded. It is also known as reading the tape. The chart below shows the chart with the time and sales data.
Reading the tape
Finally, you should do a technical analysis to identify the ideal entry and exit levels. This can involve looking at a chart and identifying patterns like the ascending triangle and bullish and bearish pennant and flags. Also, it involves using technical indicators like the Relative Strength Index (RSI) and MACD to identify key levels.
Growth or momentum and blue-chips or value stocks are two broad areas that are used to describe the various types of stocks in the market. As mentioned, trading the two types of companies is always similar, but focusing more on growth companies can produce more returns to day traders.