While investors are often keen to invest in blue-chip stocks, there are more names in the space than they might realize at first glance. But before I dive into the overlooked names I would keep an eye on, it would help if we understand what blue-chip stocks are and what they are not. Here’s a definition from the Corporate Finance Institute:
“A blue chip is a stock of a well-established corporation with a reputation for reliability, quality, and financial stability. Blue chip stocks are usually the market leaders in their sectors and have a market capitalization running into billions of dollars.”
Some might consider Dividend Aristocrats perfect examples. However, just because a stock pays dividends doesn’t necessarily make it a blue-chip stock.
That said, most blue-chip stocks deliver steady earnings over the long haul, a requirement for growing dividend payments.
Here are 7 blue-chip stocks to buy you might not think of:
- Facebook (NASDAQ:FB)
- Home Depot (NYSE:HD)
- Procter & Gamble (NYSE:PG)
- Visa (NYSE:V)
- Cigna (NYSE:CI)
- Deere & Company (NYSE:DE)
- Micron Technology (NASDAQ:MU)
To make things interesting, not to mention easy to identify, my list of seven blue-chip stocks will be selected from 7 different sectors, and only comprised of those companies in the S&P 500 whose stock symbol is two letters or less. So, for example, Citigroup (NYSE:C) would qualify. So, too, would DuPont de Nemours (NYSE:DD).
Blue-Chip Stocks to Buy: Facebook (FB)
The last time I recommended Facebook stock was in early February. Amazing as it seemed at the time, FB was flying under the radar despite generating massive amounts of free cash flow (FCF).
“In the 12 months that ended in December, Facebook generated $23.6 billion of free cash flow (FCF). Based on an enterprise value of $684.3 billion, it has an FCF yield of 3.5%. By comparison, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has an FCF yield of just 3.0% based on its $34 billion of FCF and its enterprise value of $1.13 trillion,” ” I wrote on February 4.
“When a company has just grown its FCF by 11% in 2020 and 38% in 2019, it’s hard to get too worried about the uncertainty it’s facing.”
To me, Facebook’s stock seems to be fairly valued, if not downright cheap. It’s a blue-chip stock if there ever was one.
Home Depot (HD)
There’s no question this home improvement retailer has hit a bit of a lull in 2021.
With a year-to-date total return of 3.7% through Feb. 16, HD stock was more than 150 basis points lower than the growth of the entire U.S. market. Over the past 52 weeks, Home Depot’s total return is 17.4%, more than 500 basis points less than the markets as a whole.
It seemed like only yesterday the media were talking up Home Depot stock’s domination of the markets. In September, InvestorPlace’s Josh Enomoto recommended Home Depot as one of 10 blue-chip stocks ideal for any investor.
A couple of months after my colleague’s HD call, the company reported Q3 2020 earnings that beat out analyst estimates with sales up 24% over the same period a year earlier. On the bottom line, its earnings per share were $3.18, 12 cents clear of the consensus estimate.
“Among those still in work, spending on the home continues to be a priority,” Neil Saunders, managing director of Global Data said in November. “Savings from lower outlays on commuting, eating out and not taking vacations have given consumers a pool of cash which they have diverted into home projects and activities.”
Regardless of when Covid-19 ends, Home Depot ought to continue to deliver above-average results over the long haul.
Procter & Gamble (PG)
The maker of household names such as Tide, Gillette, Head & Shoulders and so many more has really seen business improve in recent years.
Procter & Gamble reported Q2 2021 earnings in January that were better than expected. On the top line, it reported sales of $19.75 billion, $480 million higher than analyst expectations. On the bottom line, PG earned $1.64 a share, 13 cents higher than the consensus estimate.
One new product that came in handy during the pandemic was its Microban 24-hour disinfecting spray. Anything related to disinfectants did well over the past 12 months, but you have to be good to be lucky.
As a result of its strong second quarter, the company raised its sales growth projections to 5-6% in 2021, up from 3-4% earlier in the fiscal year. On the bottom line, it expects 8-10% adjusted earnings growth in 2021.
P&G does an excellent job converting income into free cash flow (FCF). For the trailing 12 months, it converted 120% of its $13.6 billion in net income into FCF.
It plans to use up to $10 billion of that $16.2 billion in FCF to repurchase its stock in 2021. With a 2.5% dividend yield, P&G remains an excellent defensive play that knows how to go on the offensive.
Is there ever a bad time to own the world’s largest payment processor?
It turns out that if you bought Visa stock this time last February, your total return over the past year would be -0.6%. This compares to a gain of 22.0% for the U.S. markets as a whole. However, over any other period — 3-year, 5-year, and 10-year — Visa has delivered annualized total returns of 20% or higher.
So, it’s a rarity to see the payment processor floundering in a market that appears to only know one direction.
The impending economic recovery brought on by an economic stimulus package, followed by a post-Covid-19 world, should do wonders for Visa’s share price. At least that’s what analysts believe.
Morgan Stanley analyst James Faucette was happy with the payment processor’s Q1 2021 report at the end of January. Earnings per share were $1.42, 14 cents clear of the consensus while revenues were $5.7 billion, $200 million better than analyst expectations.
“While commentary around near-term volume trends remains cautious, [management] spoke of keeping their current schedule of pricing increases and bring back expenses,” Faucette said at the time. “While headwinds from social distancing measures and travel restrictions persist through [January], we remain optimistic about the long-term growth of the business.”
Faucette has an outperform rating for Visa and a target price of $233. Of the 39 analysts covering V stock, 29 rate it a buy, four have it overweight, and six holds. There are no sell recommendations.
Visa will get its mojo back.
This health insurer reported fourth-quarter results on February 4. For the full year, revenues were $160.1 billion, 4.2% higher than $153.6 billion a year earlier. Adjusted income from operations was $6.8 billion, up from $6.5 billion in 2019.
Those are decent results in the middle of a pandemic. And yet, investors have given it very little love over the past year — it’s got a total return of -7.7%. Or any time over the past five years for that matter.
As part of its earnings announcement, Cigna said it expects adjusted net revenues of at least $165 billion in 2021 with adjusted income from operations of at least $6.95 billion.
Business is looking positive and that’s reflected in the analyst coverage. Of the 24 covering Cigna, 21 have it as a buy. As for the target price, it’s $258.43, providing 27% potential upside over the next 12 months.
While there’s no question Covid-19 hurt Cigna’s bottom line in 2020, the health insurer continues to grow its Evernorth health services business, which includes Express Scripts, the pharmacy benefit manager it bought in December 2018 for $54 billion.
In Q4 2020, Evernorth’s adjusted revenues grew by 19% to $30.5 billion with pre-tax adjusted income from operations of $1.59 billion.
Deere & Company (DE)
There is no question that the maker of agricultural equipment has been on a roll in recent years. Up 32.9% on an annualized basis over the past five years and 90.5% in the past 53 weeks, DE stock has a price-to-sales ratio of 2.9, more than double its five-year average.
In January 2017, I put Deere on a list of 10 stocks that ought to be in the Dow Jones Index.
“[A]griculture is the future and a prime beneficiary of that macro theme is Deere & Company (NYSE:DE) although you probably wouldn’t know it by its top- and bottom-line in recent years. In 2013, it had $6.2 billion in operating income from $37.8 billion in revenue; in 2016, its operating income was just $3 billion from $26.6 billion in revenue,” I wrote back on Jan. 18, 2017.
“However, the agriculture cycle, according to Jim Cramer, has turned and that’s putting stocks like Deere into orbit. Up 38.3% in 2016, investors can expect more of the same in 2017.”
From my January 2017 article through the end of 2017, DE stock gained 32%, virtually the same return from 2016. It’s up 199% from January 2017 through February 16.
Blue Line Capital’s Bill Baruch recently suggested that $300 was a good entry point for Deere. Hotter than a pistol in recent weeks, I’m not sure investors are going to get a chance in the near term.
Long-term, it’s hard to bet against it.
Micron Technology (MU)
Micron’s stock has gotten off to a fast start in 2021 with a year-to-date total return of 16.7%. Of course, the sector as a whole is hot. Nvidia’s (NASDAQ:NVDA) total return is 17.4% over the same time.
Yet Micron remains the value play for most semiconductor investors. While NVDA trades at 26 times sales, MU settles for 5x sales. To a certain extent, that’s a function of the markets each company serves, but the gap remains excessively large.
Of the 33 analysts that cover MU stock, 27 rate it a buy. Only one analyst believes it will be an underperformer over the next 12 months. It has an average target price of $99.20, providing 14% upside potential at current prices.
It’s my experience that Micron always seems to surprise to the upside.
My InvestorPlace colleague, Larry Ramer, recently discussed how Micron plans to use at least 50% of its free cash flow (FCF) to buy back its stock.
Ramer projects that MU will generate at least $2 billion in free cash flow in 2021. If he’s right, at current prices, Micron could buy back approximately 11.4 million of its shares. Based on 1.12 billion shares outstanding, that’s a 1% reduction in its share count.
However, when you consider that Micron repurchased 70 million shares of its stock in the past two fiscal years for a 117% return on its $2.84 billion investment — an average price paid of $40.57 — any amount of shares repurchased appears to be an excellent use of its FCF.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.