Steady growth visibility and a healthy free cash flow outlook is a winning combination for these stocks.
In a portfolio, it’s generally growth stocks that grab the limelight. Being high-beta stocks, the price action keeps investors on the edge. However, blue-chip stocks are the silent performers besides acting as a fortress for the portfolio against extreme volatility.
At the same time, there are phases where blue-chip stocks go ballistic. Before the recent bull run, Nvidia (NASDAQ: NVDA) was subdued for an extended period. However, the stock’s rally in the last 18 months has compensated for the price and time correction.
The market keeps providing opportunities, and I see multiple subdued blue-chip stocks poised to break out. It’s not necessary for the stocks discussed to rally like NVDA. However, I can say with some conviction that these blue-chip stocks can outperform index returns in the next three to five years.
Let’s discuss the business factors that make these blue-chip ideas worth considering.
Blue-Chip Stock: Lockheed Martin (LMT)
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Last year, global defense spending touched record highs of $2.44 trillion. With rising geopolitical tensions, defense spending will likely continue to increase. Amidst positive industry tailwinds, Lockheed Martin (NYSE: LMT) stock remained sideways in the last 12 months. This is a good accumulation opportunity with the defense blue-chip trading at an attractive forward price-to-earnings ratio of 18x. Further, the blue-chip defense stock offers an attractive dividend yield of 2.7%.
From a business perspective, Lockheed reported an order backlog of $159 billion as of the first quarter. A strong backlog offers clear revenue and cash flow visibility. It’s also likely that the backlog will continue to swell, translating into revenue growth acceleration. Further, as Lockheed invests in next-generation defense technologies, top-line growth will be supported.
Lockheed also has robust cash flow visibility. For the current year, the defense major has guided for free cash flow of $6.2 billion (mid-range). Healthy FCF will ensure steady dividend growth and value creation through share repurchase.
Blue-Chip Stock: Newmont (NEM)
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Newmont (NYSE: NEM) is another high-quality blue-chip stock that remained sideways in the last 12 months. A forward P/E of 15.7x looks attractive and the gold miner offers a dividend yield of 2.4%.
One potential catalyst for NEM stock trending higher is expansionary monetary policies. I expect the Fed to make its first rate cut before Election Day. A potentially weak dollar is likely to translate into further upside for gold. With the benefit of higher realized prices, NEM stock trend is likely to turn bullish.
From a business fundamental perspective, Newmont has 128 and 155 million ounces in gold reserves and resources, respectively. Besides a strong asset base, the gold miner has an investment-grade balance sheet with a robust liquidity buffer.
Further, Newmont reported operating cash flow of $776 million for the first quarter. Considering the upside in realized gold price, it’s likely that the annual operating cash flow will be more than $3.5 billion. This provides Newmont with ample headroom for aggressive investments, dividends, and share repurchases.
Blue-Chip Stock: Merck (MRK)
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Holding one or a few pharmaceutical stocks in the portfolio is always a good idea. The sector is immune to economic shocks, and pharmaceutical stocks have a significantly
Undervalued Stock Gems for Wise Investors
Merck (MRK)
Merck (NYSE:MRK) is like a hidden treasure chest waiting to be discovered in the vast sea of stock options. With a low beta and a forward P/E ratio of 15.4x, MRK stock shines brightly. Investors are further enticed by a healthy dividend yield of 2.3%.
The pharmaceutical sector, akin to a slumbering giant, is awakening from its pandemic-induced hibernation. This stirring provides a unique chance for discerning investors to capitalize on. Standing out like a beacon in this renaissance is Merck, with its robust pipeline of drugs promising a clear path to growth.
Embarking on a journey laden with promise, Merck’s pipeline boasts 80 programs in Phase 2 and 30 candidates in Phase 3 testing. While the route is diversified, the oncology segment shines as the guiding North Star, expected to propel Merck towards a $20 billion sales boost by the mid-2030s.
Chevron (CVX)
Chevron (NYSE:CVX), akin to a steady giant in the realm of energy stocks, has weathered recent storms with aplomb. Despite macroeconomic turbulence, CVX stock has remained resilient, offering an undervalued haven for investors. A bountiful dividend yield of 4.1% promises a fruitful harvest for those patient enough to wait.
What makes Chevron truly shine is its ability to generate cash flow at a stunning pace. Exhibiting the finesse of a well-oiled machine, Chevron reported an operating cash flow of $35.6 billion last year. With the winds of fortune set to blow favorably, projections hint at this figure climbing beyond $40 billion in the near future.
By embracing growth opportunities through strategic acquisitions, such as the move to acquire Hess (NYSE:HES), Chevron paints a portrait of prudence and acumen. Armed with a sturdy balance sheet, low break-even assets, and robust fundamentals, CVX stock emerges as a beacon of long-term value creation.
AT&T (T)
AT&T (NYSE:T) emerges as a phoenix rising from the ashes of doubt, shedding light on the realms of undervalued blue-chip stocks. Despite enjoying a remarkable 20% rally in the past year, T stock remains a bargain at a forward P/E ratio of 8.5x. Furthermore, a luscious dividend yield of 5.9% acts as icing on the cake.
The journey for AT&T hasn’t been without its trials, as the specter of a heavily leveraged balance sheet loomed large. Yet, the company has valiantly embarked on a journey towards deleveraging, reaping positive results along the way. The path to achieving a net-debt-to-adjusted-EBITDA of 2.5x by the first half of 2025 serves as a testament to this resolve.
With expectations of reporting free cash flow between $17 to $18 billion for the current year, AT&T paints a portrait of stability and growth. As the average revenue per user continues its upward trajectory, fueled by the dawn of 5G technology, the future holds promise and potential.
Vale (VALE)
Vale (NYSE:VALE) stands as a shimmering nugget in the realm of industrial commodities, beckoning wise investors with its allure. In the landscape of undervalued asset classes, industrial commodities exude an appeal akin to uncharted territories waiting to be explored.
As the world dances to the tune of expansionary policies, Vale asserts its presence as a steadfast player in this grand symphony. With a legacy intertwined with growth and resilience, Vale embodies the essence of hidden treasures waiting to be unearthed by those with vision and foresight.
Navigating the Investment Waters: A Deep Dive into Blue-Chip Commodity Stocks
Analysis of Vale (NYSE: VALE)
Amidst the tumultuous seas of the investment world, blue-chip commodity stocks emerge as sturdy vessels, weathering the storm with resilience. One such stalwart is Vale (NYSE: VALE), currently trading at a seemingly undervalued position with a forward P/E ratio of 4.9x. This valuation gap presents an intriguing opportunity for investors, with promising returns forecasted over the upcoming 24 to 36 months.
The first quarter unveiled a beacon of hope for Vale, as the mining company reported a 15% increase in iron ore sales to 8.2 metric tons from the previous year. This surge marked the highest quarterly iron ore production levels since 2019. Additionally, copper sales rose by an impressive 22% to 14.1 kilotons during the same period.
Powered by operational enhancements, Vale showcased robust performance metrics, reporting an adjusted EBITDA of $3.5 billion for the quarter. Despite prevailing subdued commodity prices, the company generated a free cash flow of $2 billion. The outlook remains optimistic, with expectations of annual free cash flow surpassing $10 billion should commodity prices experience an upward trajectory fueled by expansionary policies.
Vale’s voyage through turbulent times has been steered by a sturdy balance sheet, accentuated by operational improvements and the tantalizing potential for commodities to soar, signaling a bullish trajectory for VALE stock.
Exploring Altria Group (NYSE: MO)
In the realm of consumer staples, Altria Group (NYSE: MO) stands as a titan grappling with the winds of change. The stock, trading at a forward P/E of 9x and offering a dividend yield of 8.4%, has endured a period of correction over the past five years, setting the stage for a potential resurgence.
The tempestuous headwinds of regulation have lashed the growth prospects of vaping and e-cigarette products, contributing to the stock’s prolonged correction. As Altria steers its ship towards a transformation in the non-smoking category, the ripple effects are felt through margin revenue contractions. However, the smokable segment remains a steady revenue stream, anchoring the company’s financials.
On the horizon of innovation, Altria’s subsidiary, Njoy, has secured FDA approval for its menthol e-vapor products, a significant milestone amidst regulatory turbulence. The brand’s expansive market reach, extending to over 80,000 stores, positions it for growth. In parallel, Altria’s market share in the oral tobacco segment is on the rise, signaling the fruition of its business transformation endeavors.
The winds of change are blowing in favor of Altria, and with market dynamics aligning with its strategic shifts, a resurgence in MO stock seems imminent, awaiting only the cue for a dramatic ascent to new heights.
