Tuesday, 13 October 2009

The TSX and How Blue Chip Stocks Have Done: Food for Thought

For those shaken up by the market turmoil of last fall and looking to big companies, the supposed steady blue chip stocks for safety, it is worth a look at the evolution of the TSX to get an idea of how safe or risky such stocks might be.

The TSX from 1995 to July 2009
The TSX has changed tremendously since 1995, as the following table shows.

It reveals some Sobering Facts:
  • Many companies have disappeared - Of the top 25 companies in the 1995 list (on the left), about half no longer exist (12, indicated by white lines). Most have merged with others, perhaps minimizing losses for an investor, or maybe even making a profit, but several are spectacular business failures, such as the current headline star, Nortel.
  • Many companies have slipped - The largest company by market value in 1995, BCE Inc. has slipped badly - to 17th spot overall. It is not alone. Another eight companies that still exist like BCE have gone down in the rankings and lost market cap share (they are the ones with red negative percentages in the column comparing 1995 with 2009 market cap share / % of Index).
  • A small minority have risen - Only four companies, three of them banks, have stayed in the top 25 and increased their position.
  • The index itself has shrunk considerably - not shown on the table is the fact that the TSX composite in 1995 had 300 companies while today there are only 208, a reduction of almost a third. For investors practising index investing and seeking safety in diversification, that is a noticeable difference and all the more reason, in the opinion of this writer, to look to beyond Canada to invest.
Some Encouraging Facts:
  • All the big banks have survived and mostly thrived - The Royal Bank has strengthened its lead. For investors in blue chips and dividend payers, the banks have shown great consistency when all about there has been great turmoil and change. The big question all investors must ask themselves today is whether the future will be like the past for the banks.
  • A few new companies have rocketed from nowhere to the top - RIM, CNR and Goldcorp were not even in the TSX in 1995, let alone in the top of the table. The search for and identification of new winners is a worthwhile task, but not easy.

As the cliche goes, those who ignore history are condemned to repeat it. Depending which companies you choose, that could be good or bad.

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