7 Quiet Blue-Chip Stocks on the Verge of a Big Breakout Rally

Stocks to buy

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.

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.

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.

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 low beta. Merck (NYSE:MRK) is among the attractively valued names to consider at a forward P/E of 15.4x. MRK stock also offers a generous dividend yield of 2.3%.

Pharma stocks have been relatively subdued since the pandemic. With the global disease burden on the rise, this presents a good buying opportunity. Specific to Merck, a strong pipeline of drugs provides clear growth visibility. Currently, 80 programs are in Phase 2, and 30 candidates are in Phase 3 testing.

The pipeline is currently diversified, but the oncology segment is likely to be the key growth driver. Merck expects that the oncology pipeline will translate into $20 billion in incremental sales by the mid-2030s.

For the first quarter, Merck reported healthy sales growth of 9% on a year-on-year basis to $15.8 billion. For the same period, the GAAP earnings per share surged by 68% to $1.87. Based on the guidance, healthy numbers will continue to flow, and MRK stock is likely to trend higher.

Chevron (CVX)

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Oil has been subdued due to macroeconomic headwinds, which has translated into weakness in oil and gas exploration stocks. With rate cuts impending to drive growth, it’s likely that oil will trend higher. It’s, therefore, a good time to accumulate quality energy stocks. Chevron (NYSE:CVX) remained sideways in the last few quarters and looks undervalued. The 4.1% dividend yield stock is poised for a breakout rally relatively soon.

A key reason to like Chevron is that the business is a cash flow machine. Last year, Chevron reported operating cash flow of $35.6 billion. If oil trends higher, it’s likely that the annual operating cash flow potential will be more than $40 billion. This will provide Chevron with ample flexibility for aggressive investments and dividend growth.

With an investment-grade balance sheet, Chevron has also pursued inorganic growth. Acquiring Hess (NYSE:HES) will boost production growth and the overall cash flow potential. Overall, with low break-even assets and strong fundamentals, CVX stock is likely to be a long-term value creator.

AT&T (T)

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AT&T (NYSE:T) is possibly among the most undervalued blue-chip stocks. Even after a 20% rally in the last 12 months, T stock trades at a forward P/E of 8.5x. Further, the communication services stock offers a robust dividend yield of 5.9%.

A key challenge for AT&T has been a highly leveraged balance sheet. However, the company has focused on deleveraging, and the outcome has been positive. AT&T is on track to achieve a net-debt-to-adjusted-EBITDA of 2.5x in the first half of 2025.

For the current year, the company expects to report free cash flow of $17 to $18 billion. With positive business metrics, it’s likely that FCF will continue to swell. This will support deleveraging, besides providing flexibility for dividends.

My view on higher FCF is also supported by the fact that the average revenue per user has been in an uptrend. As 5G adoption increases, the average revenue per user will likely remain healthy.

Vale (VALE)

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Industrial commodities are among the most undervalued asset classes. With expansionary policies on the cards, it’s a good time to bet on blue-chip commodity stocks. Vale (NYSE:VALE) stock trades at a significant valuation gap at a forward P/E of 4.9x. I expect healthy returns from the stock in the next 24 to 36 months.

For the first quarter, Vale reported iron ore sales increase of 15% from a year ago to 8.2 metric tons. The mining company recorded highest quarterly iron ore production since 2019. For the same period, copper sales increased by 22% to 14.1 kilotons.

With operational improvements, sales have increased, and Vale reported an adjusted EBITDA of $3.5 billion for the quarter. Further, free cash flow was $2 billion, even with relatively depressed commodity prices. I expect annual FCF to be more than $10 billion if commodities trend higher on expansionary policies.

Overall, Vale has navigated challenging times with a healthy balance sheet. With operational improvements and the potential for an upside in commodity prices, VALE stock will likely surge higher.

Altria (MO)

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Altria Group (NYSE:MO) stock experienced price correction in the last five years. MO stock trades at a forward P/E of 9x and offers a dividend yield of 8.4%. I believe the consumer staples stock will likely breakout on the upside.

There are two reasons for an extended time correction in the stock. First, regulatory headwinds have impacted growth in vaping and e-cigarette products.

Further, Altria is in a phase of business transformation towards the non-smoking category. This has translated into margin revenue de-growth. Having said that, the smokable segment continues to be a cash flow driver.

Altria subsidiary Njoy received authorization from the Food and Drug Administration for its menthol e-vapor products. This is the only menthol e-vapor product authorized by the FDA. The brand has already broadened its distribution to over 80,000 stores.

The authorization is likely to support growth. At the same time, Altria has been gaining market share in the oral tobacco category. Therefore, the business transformation efforts yield results, and it’s a matter of time before MO stock surges.

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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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