It’s an established point that blue-chip stocks are an essential part of the portfolio. The exposure to blue-chips can differ based on the risk-taking ability of an investor. Within the blue-chip portfolio, the following strategy seems to be the best.
First, exposure to some evergreen blue-chip stocks with an investment horizon of five to ten years.
Further, exposure to blue-chip stocks for a time frame that’s less than five years. The split is because even the best blue-chip names go through a lean period in terms of stock performance. This can be due to temporary industry or company headwinds.
Once the headwinds wane, blue-chip stocks can surge from undervalued levels. The returns can far exceed index returns. This column focuses on blue-chip opportunities subdued in the last 12 to 24 months. However, the same ideas will likely go ballistic in the next 36 months and comfortably beat index returns.
Let’s discuss the reasons for being bullish on these blue-chip stocks.
Lockheed Martin (LMT)
Global military expenditure surged 6.8% yearly for 2023 to $2.44 trillion. This was on the back of heightened geopolitical tensions. Expenditure will likely continue to trend higher and defense stocks are an attractive investment option.
Among blue-chip stocks, Lockheed Martin (NYSE:LMT) looks undervalued at a forward price-earnings ratio of 17.8. Despite positive business developments and industry tailwinds, LMT stock has remained sideways in the last 12 months. This seems like a good accumulation opportunity before a big breakout rally.
It’s worth noting that Lockheed ended Q4 2023 with a record order backlog of $160.6 billion. This provides clear revenue and cash flow visibility. For the current year, Lockheed has guided for free cash flow of $6.2 billion. This will ensure stable dividends and flexibility to invest in research & development. Lockheed is also at the forefront of innovation, and next-generation defense technology solutions will ensure that the backlog continues to swell.
AT&T (T)
AT&T (NYSE:T) is among the most undervalued blue-chip stocks to buy. T stock trades at a forward price-earnings ratio of 7.5 and offers an attractive dividend yield of 6.72%. It’s worth noting that after remaining depressed for an extended period, T stock has increased by 8% in the last six months. It’s not big returns by any means, but an indication that the stock has bottomed out.
A key reason to like AT&T is the continued improvement in financial metrics. Last year, AT&T reported a free cash flow of $16.8 billion. Net-debt-to-adjusted EBITDA declined to 2.97x by the end of the year. With positive business metrics likely to sustain, I expect continued deleveraging.
Among the positive business metrics, AT&T has continued to add 5G wireless and fiber subscribers. At the same time, the average revenue per customer has been on a gradual uptrend. This is likely to support EBITDA margin expansion. For the current year, AT&T has guided for free cash flow of $17 to $18 billion. Therefore, the outlook is positive and it’s a matter of time before T stock surges from deeply oversold levels.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock sentiment has been significantly bearish and the correction seems unabated. However, the best time to buy a story is when the negative commentary is profound. PFE stock seems to be trading at a valuation gap, and I expect a strong reversal rally from the current level of $26. It’s worth noting that the stock offers a robust dividend yield of 6.46% and dividends are sustainable.
In 2023, Pfizer received a record number of nine new molecular entity approvals by the U.S. Food and Drug Administration. This will have a positive impact on growth in the coming years. Further, the long-term growth outlook is steady, with a pipeline of 112 new molecular entities. Pfizer is targeting $20 billion in incremental revenue from new molecular entities by 2030.
Another area where Pfizer has focused is acquisition-driven growth. In December 2023, the acquisition of Seagen was completed. This provides Pfizer significant inroads in the oncology segment. By the decade’s end, Pfizer is targeting $25 billion in revenue from new business deals. Therefore, despite the decline in COVID-19 vaccine revenue and drugs going off-patent, PFE stock sell-off is overdone.
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.