3 Cheap Blue-Chip Stocks: Buy, Sell or Hold?

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The blue-chip stocks are back in the headlines now that the Dow Jones Industrial Average hit a new record close this week, but the popular index is still playing catch up this year, which makes some cheap blue-chip stocks look enticing.

cheap blue chip stocks

The Dow is up 3.4% for the year-to-date, putting it on track for okay full-year gains. The broader market, meanwhile, is outperforming the blue chips by a wide margin. The S&P 500 is up 8% so far this year and has already surpassed analysts’ initial forecasts for all of 2014.

Although the Dow beating the broader market is highly unlikely this year, a cherry-picked portfolio of blue-chip stocks very well could. Plus, if those stocks don’t break the bank when it comes to price and valuation — even better.

Heck, at more than $200 a pop, Visa (V) is the highest priced stock in the Dow, and it’s expensive on a valuation basis, fetching 21 times forward earnings. That’s a double-whammy for many retail investors.

On the other end, you can find quality stocks with the lowest prices and relatively cheap valuations in the Dow. If you’re keen on finding cheap blue-chip stocks, these three members of the Dow Industrial are a good place to start:

Cheap Blue-Chip Stocks: Cisco Systems (CSCO)

Cisco blue-chip stocks CSCOAt $25-and-change, Cisco Systems (CSCO) is the cheapest stock in the Dow by face value. Cisco also looks like a bargain by relative valuation. The forward price-to-earnings ratio of 11 represents about a 25% discount to the broader market.

On the other hand, Cisco’s days of superior growth are behind it. Yes, CSCO stock is cheaper than the S&P 500, but then its projected long-term growth forecast is lower than the broader market’s too.

Whether that justifies the discounted share price in the short term, however, is up for debate. After all, earnings-per-share are expected to increase 10% through the end of 2016.

Don’t forget that with a 3% yield, CSCO pays a pretty generous dividend, especially for a tech stock.

If you’re looking for growth, you can do better than CSCO stock, but if you’re looking for a stable, dividend-paying battleship of a stock, Cisco is a buy. While everything else in tech gets disrupted seemingly every other day, Cisco plugs along making the backbone of the internet, to say nothing of acquisitions.

Cheap Blue-Chip Stocks: General Electric (GE)

General Electric GE blue-chip stocksGeneral Electric (GE) is certainly friendly on a per-share basis, going for a bit more than $26. At a shade over 14, the forward P/E isn’t a deal-breaker, either. Whether GE is a buy, however, depends on what you’re looking for.

GE has wisely become less dependent on its financial services business since the credit crisis, but it’s still going to be a drag on revenue as the company shrinks it. In the most recent quarter, financial services revenue fell 6%.

At the same time, GE is focusing on making its industrial division more profitable. Margin expansion there is key because industrial revenue is driving the GE train, rising 7% in the latest quarter.

GE Capital is on the mend as financial stresses ease, and the market knows that GE is intentionally making the unit smaller. At the same time, industrial revenue has more upside as the economy slowly gains steam, and companies incrementally spend more on capex.

If you’re looking for equity income, GE is a buy on the stable 3.5% yield on the dividend. If you’re looking for growth, however, GE is a hold based on this very slow-growth recovery.

Cheap Blue-Chip Stocks: Pfizer (PFE)

pfizer blue-chip stocks pfePharmaceutical giant Pfizer (PFE) is the third-cheapest stock in the Dow by face value, but it sure doesn’t look like a bargain. PFE stock goes for nearly 14 times forward earnings despite having a growth trajectory of just 3%. The S&P 500 goes for more than 15 times forward earnings with a long-term growth forecast of more than 10%.

Like much of the pharma industry, Pfizer is struggling with the loss of exclusivity on blockbuster drugs. Heck, Lipitor came off patent two years ago, and it’s still weighing on revenue.

Unless Pfizer can acquire a company with some hits in the pipeline, it can’t do much about revenue in the short run. Developing and getting regulatory approval for new drugs can take a decade or more.

Pfizer tried to solve its slumping revenue problem by buying AstraZeneca (AZN) earlier this year. AZN rejected what would have been the biggest merger in pharma history, and PFE stock still hasn’t recovered. Indeed, PFE stock is down 2% for the year-to-date.

Yes, at 3.6%, the dividend yield on PFE stock looks like a winner, but that’s only true if Pfizer had some growth in it. Unlike Cisco or GE, which are slow-growth companies, Pfizer is actually going backward. Pfizer’s EPS is forecast to fall next year by a penny. Given that the potential downside in PFE stock could easily wipe out any gains from the dividend, Pfizer is a blue-chip stock to sell.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/cheap-blue-chip-stocks-ge-cisco-pfizer/.

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