I generally associate growth stocks with an adrenaline rush. On the other hand, blue-chip stocks provide a peaceful night’s sleep. With global markets remaining significantly volatile, I would prefer to go overweight on blue-chip stocks.
Blue-chip stocks offer two main advantages. First, these are low-beta stocks and therefore help in capital preservation. Second, these stocks provide investors with regular cash flow through dividends. Even if the stock remains sideways, dividends make the portfolio look better.
In current market conditions, it’s also not difficult to find undervalued blue-chip stocks. These stocks can also provide healthy capital gains when market sentiment reverses. This column includes such undervalued names.
Warren Buffett has been a big buyer of oil and gas stocks in 2022. A key reason is the possibility of energy prices remaining firm in the coming years.
This will translate into robust cash flows for oil and gas companies. Among blue-chip stocks, Chevron (NYSE:CVX) is the top name to consider.
After a rally of 67% in the last 12 months, the stock has been in a consolidation mode. The 3.57% dividend yield stock is worth considering before the next rally.
From a credit perspective, Chevron reported net debt of 8.3% as of Q2 2022. The company also reported an operating cash flow of $13.3 billion for the quarter. With a strong balance sheet, the company is positioned for aggressive investments and sustained dividends.
As a matter of fact, Chevron has planned to invest $15 to $17 billion annually through 2026. This will ensure steady production and a healthy reserve replacement ratio. Overall, CVX stock seems like a long-term value creator.
Retail stocks corrected sharply in May 2022 as the result of concerns related to inflation and its impact on margins. However, Costco (NASDAQ:COST) stock witnessed a sharp recovery. A key reason is that the company continues to report numbers that are better than peers.
For the forty-eight weeks ended July 2022, Costco reported revenue of $205.2 billion. On a year-on-year basis, revenue growth was 16.4%. With e-commerce operations supporting growth, it’s likely that comparable store sales will remain robust.
Costco also has 116.6 million cardholders with a 92.3% renewal rate in U.S. and Canada. In the last twelve months, the company reported $4.1 billion in membership fees.
It’s likely that membership fees will continue to swell as the company expands in the U.S. and internationally. As an example, the company only has two warehouses in China so far.
In terms of shareholder returns, Costco initiated dividends in May 2004. Through the years, the dividend has increased at a CAGR of 13%. With healthy growth in top line and a strong balance sheet, I expect dividend growth to sustain.
In the technology space, Apple (NASDAQ:AAPL) is my choice among blue-chip stocks.
I believe that AAPL stock is attractive at a forward price-to-earnings ratio of 27.5. Further, with strong cash flows, dividend growth is likely in the coming years.
From a business perspective, the iPhone segment will remain the key cash flow driver. Steady growth momentum is likely with the increase in 5G phone sales. Also, Apple is diversified with segments like services and wearables increasingly contributing to top-line growth.
It’s also worth noting that Apple has a huge cash glut. This can be used for aggressive inorganic growth and entry into new segments. It seems probable that Apple will launch its electric car in 2024. This is a potential catalyst for the stock moving higher.
Overall, Apple has an innovation edge and that’s the key reason to remain bullish. After returns of 12% in the last 12 months, the stock seems to be poised for a bigger rally.
I believe that Pfizer (NYSE:PFE) is the most undervalued name among pharmaceutical stocks. The blue-chip stock trades at a forward P/E of 7.5 and also offers a dividend yield of 3.25%.
I would not be surprised if PFE stock doubles in the next 24 months.
Pfizer reported windfall profits in 2021 on the back of covid-19 vaccine sales. The company reported free cash flow of $29 billion last year. On a relative basis, vaccine sales have decelerated in 2022.
However, there are two important points to note. First and foremost, Pfizer has a deep pipeline of drugs in various stages of clinical trials. These drug candidates provide revenue growth visibility.
For 2022, the company also plans research and development expenses of $12 billion. Big investments will help in accelerating the pipeline toward commercialization. Furthermore, Pfizer is utilizing the excess cash flows for acquisitions. This will further help in broadening the company’s portfolio.
Overall, PFE stock valuation indicates that the downside potential is capped from current levels. The upside potential is however significant and investors will continue to benefit from robust dividends.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.