5 Bargain Blue Chips to Buy After the Pullback

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blue chip stocksA lot of folks out there are worried about the state of the stock market. The August crash shook investor confidence, and Wall Street went from hoping the Dow could cross 13,000 for the first time since 2008 to hoping the benchmark didn’t fall back to 2009 lows.

But buy-and-hold investors shouldn’t be too concerned with the gyrations of the market over the past several weeks. Yes, the broader stock market remains about 10% lower than where it was at its July peak, but the long-term trend of the market remains clearly upward since the financial crisis lows of 2008 and 2009.

That means if you have some extra cash lying around, you might want to consider bargain hunting after the recent pullback. Make no mistake: Some companies were sold off for a reason. But by limiting yourself to big-name blue chips with stable businesses and decent dividend yields, you can ensure your portfolio will withstand any short-term volatility and likely come through with a handy profit a few years down the road.

Here are five such low-risk investments that I think are bargains for long-term investors right now:

AT&T

One of the biggest blue chips out there is AT&T (NYSE:T). The company boasts a $175 billion market cap, almost $125 billion in annual revenue and an entrenched position in the telecom industry.

So what’s to like about AT&T? For starters, the dividend. Shares boast a yield of about 5.8% right now to mark the best the Dow Jones components have to offer. Ten-year T-Notes offer about 2.2% right now and most “high-yield” savings accounts and CDs are even less, so the income potential of AT&T alone puts it in an attractive category given the lack of alternatives.

What’s more, shares still are 7% off their July peak despite the market’s rebound from August lows and are right in the middle of AT&T’s 52-week trading range between about $26.50 and $32. It’s reasonable to expect AT&T to break through previous highs — especially if merger plans with T-Mobile win approval and further strengthen the company’s grip on the smartphone market with what could become a 42% market share. On the downside, AT&T dipped down to as low as $22 in March 2009, but aside from a week or two in July 2009, it never again closed beneath $24. Even if you’re afraid the market will retest the financial crisis lows, AT&T stood tall then and will do so again.

Cisco

In the depths of the brutal 2008-09 selloff, Cisco (NASDAQ:CSCO) flopped from around $25 per share to briefly bottom out under $14. As of this writing, shares are hovering in the low $15 range.

Yes, investors have had good reason to sell off CSCO stock in recent months as Juniper Networks (NYSE:JNPR) has elbowed into the corporate marketplace, and bloated operations have stifled Cisco’s ability to adapt to the cloud computing revolution. But there are reasons to be optimistic CSCO is righting the ship. In the past year, there has been a big management shakeup, thousands of layoffs and production changes that include a shift away from consumer offerings of its DVR and Flip video camera manufacturing. The turnaround might come at the perfect time for investors who buy in during the current mayhem.

Wall Street insiders seem to think things are turning around at Cisco. According to 36 “experts” surveyed by Thomson/First Call, the median target is $19.02 on CSCO and the median is $18. That’s roughly 15% to 25% above current valuations. Not setting the world on fire, but in this difficult market those are gains most investors would be satisfied with.

Maybe that’s why both Stifel Nicolaus and Wunderlich both upgraded CSCO to “buy” on Aug. 11 after earnings, with targets of $17 and $20, respectively.

What’s more, Cisco began offering a decent dividend in March and currently boasts a yield of about 1.7%. In this environment, investors should be wary of any stock that doesn’t offer a dividend and stick with cash-rich blue chips like Cisco.

Wal-Mart

Wal-Mart (NYSE:WMT) has not been inspiring in the last year. Discounters like Dollar Tree (NASDAQ:DLTR) have been eating Wal-Mart’s lunch for a while, and the big-box giant hasn’t posted same-store sales growth in the U.S. for the past two years.

But this mega-cap retailer isn’t exactly going out of business. WMT revenues and yearly EPS have grown steadily in each of the past four fiscal years despite the economic downturn and trouble with same-store traffic.

Also, the company has been trying to reconnect with consumers via big strategic initiatives. A plan to squeeze Wal-Mart into urban locations with smaller store plans could tap into big revenue streams domestically. And if not, a big emerging-markets push could help offset the company’s U.S. shortfalls. The global Wal-Mart plan — including May’s $2.4 billion buyout of South Africa retailer Massmart and a recent report that indicates a nearly $760 million investment in Brazil — could help reverse the company’s fortunes.

It seems Wall Street is conflicted about WMT stock, since shares of the retailer popped to $58 briefly in January before slumping, then popped again to $56 in May before the spring selloff. The mean target for Wal-Mart among 21 analysts surveyed by Thomson/First Call is just north of $60, and the media price target is $61 — a 12% to 15% jump from current valuations if it sticks. Then again, no “experts” have been willing to adjust their targets lately. The most recent rating is “neutral” from UBS, with a price target of $60 — right on par with the consensus.

There are legitimate concerns about Wal-Mart’s growth potential and same-store sales. However, low-risk investors looking for bargains should simply be content with the fact that WMT is a bulletproof stock that seems undervalued. A double-digit upside can’t be pooh-poohed these days.

Throw in the roughly 2.8% dividend and you’ve got a decent buy in Wal-Mart.

McDonald’s

Despite its massive size, McDonald’s (NYSE:MCD) continues to cook up great results for shareholders — most recently in July, quarterly results showed a 16% revenue increase and 15% increase in earnings. The stock has outperformed the market nicely, adding 18% so far in 2011 compared with a flat market, and about 45% since January 2010 while the market is up just 10% in the same period.

That’s in part because more than half of McDonald’s revenue comes from outside the U.S., where the company still can see big growth. Same-store sales climbed 5.6% globally, according to July numbers.

That international exposure also is good news if default comes to roost. With its large cash flows, the company will have the resources to continue to innovate and experiment with new products like its recent frozen lemonade concoction that has helped juice summer sales.

That reliable revenue stream also throws off a plump dividend of 2.8%. Getting paid twice with McDonald’s stock is something investors should be mighty pleased about.

Lest you think McDonald’s already has seen its pop and is going to run out of momentum, despite the stock’s impressive performance, it appears to be fairly valued. The company still has a fairly modest forward P/E of around 15.7. On Aug. 1, the P/E of the S&P 500 was roughly 15.6.

Pepsi

If you’re looking for another domestic consumer powerhouse with an emerging market footprint, PepsiCo (NYSE:PEP) is a good choice. Pepsi reported $6 billion in net income during the past four quarters, making it very entrenched, but it remains aggressive in its plans to increase sales overseas.

In the latest quarter, beverage volume growth increased 13% in China, 17% in India and 15% in Turkey. That potential cannot be overlooked, especially considering that global consumer spending isn’t all it’s cracked up to be. Companies like Pepsi that are tapping into underdeveloped regions rather than relying on Europe and the U.S. could be the market leaders in the months ahead.

And beyond these brisk drink sales abroad, there are plenty of foodstuffs that will keep revenues booming at home, even in tough times — including products like Quaker Oats and Lay’s potato chips. That provides a stable revenue stream and a good foundation for the company.

Pepsi just took a tumble after its recent Q2 earnings report and disappointing outlook, but this selloff might be a buying opportunity. Immediately after the earnings report and resulting decline in late July, UBS issued a “buy” rating with a target of $79. Stifel Nicolaus did the same with a target of $75. PEP shares are languishing around the $65 mark, and that means these firms are plotting a 15% to 20% upside.

The final selling point is the tremendous income potential of PepsiCo. The company raised its dividend for its 39th consecutive year in May, and the company has paid dividends since 1952. The company now yields 3.1% and has seen an annual growth rate of 12.6% in its dividend during the past five years — a sign of stable income if ever there was one.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/blue-chip-stocks-to-buy-pullback/.

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