Cheap Blue Chip Stocks: 7 Stocks Too Cheap to Ignore
The 2022 stock market downturn has created the opportunity to take long-term positions in various stocks at bargain prices. After watching the best cheap micro cap and mid capitalization stocks there, let’s turn our attention to cheap blue chip stocks.
Typically, blue chips or stocks of venerable, well-established companies are not cheap. This is not to say that they are generally overvalued or that investing in blue chips results in lower than normal returns if you don’t buy them at a discount.
As Warren Buffett’s famous quote says“It’s far better to buy a great business at a fair price than a fair business at a great price.”
But what if you could buy a “great business” for a more than fair price? There may be the possibility of even more substantial long-term returns. First, market conditions are normalizing, causing discount blue chips to return to fair prices. Then steady gains from price appreciation and dividends over a longer period.
So what are the best cheap blue chip stocks today? Consider these seven companies, each of which is a high quality company that is currently trading at a low valuation.
|PSTN||British American Tobacco PLC||$36.81|
|GOOG, GOOGL||Alphabet||$99.57, $98.68|
|JPM||JPMorgan Chase & Co.||$105.98|
British American Tobacco PLC (BTI)
Prime tobacco stocks like British American Tobacco PLC (NYSE:PSTN) trade at low valuations, even in a bull market. This, of course, is because the industry’s cash cow, cigarettes, is in secular decline. There is great uncertainty about whether “big tobacco” can still thrive in a post-cigarette future.
Yet recently, BTI stock has fallen to a meager price. Today, you can buy this global tobacco giant (whose brands include Camel and Newport) for just 8.1x future earnings. Besides being cheaper than the overall market, BTI is also cheaper than its peers Altria Group (NYSE:MO), which trades for approximately 8.6x future earnings.
Not only that, unlike Altria, which billions lost on his Juul Laboratories investment, British American Tobacco has demonstrated success in diversifying its product line beyond cigarettes. This may put him in a good position to maintain (and develop) his high performance. 7.99% dividend.
Alphabet (GOOG, GOOGL)
It may be a relatively young company and not pay a dividend, but it’s fair to say Google relative Alphabet (NASDAQ:GOOGNASDAQ:GOOGL) is a blue chip title. This is due to several factors, including a deep economic moat, high operating margins and a strong balance sheet.
You may agree that GOOG stock is a safe bet, but disagree that it is one of the cheap blue chip stocks. I agree with you that this security is not “undervalued” in absolute terms, as it is trading for 18.8x earnings, in line with the main indices as the S&P500,
However, Alphabet’s current earnings multiple may overestimate how long its core digital advertising business will remain stalled and underestimate the company’s potential to reaccelerate earnings growth. Stocks have strong rebound potential once the digital advertising market recovers and Alphabet other growth catalysts start playing.
While Alphabet is a bottom-up tech blue-chip, IBM (NYSE:IBM) is a first-rate technological “dinosaur”. At least, that’s the market’s perception of this more than 100-year-old technology company.
Negotiate for 19.3x earnings and with a forward dividend yield of 5.44%, critics of this stock will warn you that it is a value trap and possibly a yield trap. Yet despite “Big Blue’s” poor performance over the past decade (down nearly 38.5%), the next ten years could be much brighter for IBM stock investors.
Why? This is due to its ongoing transformation primarily into a hybrid cloud computing company. Through targeted acquisitions, IBM continues to strengthen its presence in the hybrid cloud space. Helping it steadily become a faster growing company could lead to a substantial increase in IBM stock prices in the years to come.
JPMorgan Chase & Co. (JPM)
As InvestorPlace Joel Baglole recently mentioned, JPMorgan Chase & Co. (NYSE:JPM) was hammered by market concerns about a recession. These concerns have outweighed the tailwind of this banking giant, namely the sharp rise in interest rates, which suggests increased profitability.
However, it is safe to say that these recessionary concerns are already fully factored into the valuation of JPM shares. Shares of the currency hub bank are currently trading at 9.7x estimated 2022 earnings. However, this valuation does not at first glance look like a big discount, down from its valuation over the past five years.
If JPMorgan Chase can weather today’s economic storms and capitalize on the current rising rate environment, future operating results could be stronger than expected. A bank equity analyst (Keith Horowitz of Citi) anticipate this. A string of earnings beats could allow JPM to raise its rating.
If you’re looking for cheap blue chip stocks on a screen, chances are one of the first ones you find is Pfizer (NYSE:DFP). The pharmaceutical giant is trading at an extremely low valuation (only 8.28x earnings), although there is a caveat.
You can tell earnings in 2021 and 2022 were “boosted” by the rollout of its Covid-19 vaccine, which the company co-developed with BioNTech (NASDAQ:BNTX). With the wave of vaccinations long past, Pfizer’s revenue is set to plummet.
However, even with an expected decline in earnings per share (or EPS) of $6.49 to $5.09 next year, PFE stock is still cheap. Based on next year’s estimates, Pfizer is trading for 8.5 times earnings. There could be room for the shares to rise, towards a valuation on par with other pharmaceutical stocks. Pfizer’s peers are trading at a valuation closer to ten times earnings.
Verizon Communications (VZ)
Rising interest rates have put pressure on telecommunications stocks, which investors buy mainly for their high dividends. Verizon Communications (NYSE:VZ) may not be as popular as AT&T (NYSE:J) among dividend investors, but this factor pushed this “Baby Bell” nearly 28% less since the start of the year.
If rates continue to rise, VZ stock will likely fall. However, if your bullish rates don’t go much higher from here and you’re looking to grab dividend-paying stocks at attractive valuations, now might be a good time to buy.
Verizon’s forward dividend yield is currently around 7:08 a.m.%. That’s only slightly less than AT&T’s current forward yield about 7.43%. Not only that, as I said before, VZ beats the T stock in areas such as dividend coverage and dividend growth. Bargain for only 7.4x earningsalthough superior to AT&T’s current multiple of 5.6xVZ is cheap, even among cheap blue chip stocks.
Until the beginning of this month, ExxonMobil (NYSE:XOM), like other oil stocks, fell. It came alongside falling crude oil prices amid fears that a drop in demand from the recession could outweigh the impact on supply caused by the invasion of Ukraine. by Russia and the sanctions that followed.
However, so far in October, Oil (and XOM stock) has started to rebound. Hopes of a ‘normal’ oil price have been dashed as OPEC and its allies have accepted production cuts. This could counteract any impact on demand from a recession, allowing prices to remain high.
In turn, this allows ExxonMobil’s current level of profitability to continue. Currently trading at an updated valuation of 11x winnings, in anticipation of lower oil prices, XOM may rise due to multiple expansions. The company capital allocation plan can also help move the needle over a longer period.
At the date of publication, Thomas Niel had a long position in MO. He has not held (neither directly nor indirectly) any position in the other securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.