Editor’s Note: This article was updated on November 19, 2021 to bring you the latest available information.
In general, investors tend to overweight their portfolios toward growth stocks in a bull-market. In our current bull-run, speculative meme stocks have also been in focus. However, even a high-risk portfolio needs to have some exposure to blue-chip stocks.
There are several advantages that these blue-chip stocks offer.
First and foremost, they help diversify your portfolio and reduce the overall beta. In the event of a meaningful market correction, these blue-chip stocks protect from capital erosion.
Additionally, most blue-chip companies have strong cash flows. Blue-chip stocks might not provide multi-fold returns in quick time. However, there is constant shareholder value creation through dividends and share repurchase.
I believe that these stocks have upside potential in addition to an attractive dividend yield. Here are the 10 best blue-chip stocks to buy for 2022:
- Chevron Corporation (NYSE:CVX)
- Apple (NASDAQ:AAPL)
- Walmart (NYSE:WMT)
- Tesla (NASDAQ:TSLA)
- Microsoft (NASDAQ:MSFT)
- Lockheed Martin (NYSE:LMT)
- Pfizer (NYSE:PFE)
- Freeport-McMoRan (NYSE:FCX)
- JP Morgan Chase (NYSE:JPM)
- Amazon (NASDAQ:AMZN)
It’s worth noting that the S&P 500 trades at a cyclically adjusted price-to-earnings ratio of 38.4x. Valuations might be stretched in the near term. It, therefore, makes sense to have exposure to some blue-chip stocks in 2022.
Best Blue-Chip Stocks to Buy: Chevron Corporation (CVX)
As global economic activity accelerates, it seems likely that positive momentum will sustain for oil. Exposure to the energy sector is likely to deliver returns in 2022.
Among blue-chip stocks, CVX stock looks particularly attractive given its investment grade balance sheet. Additionally, the stock offers investors an annualized dividend of $5.36, implying a yield of 4.64%.
There are two important points to note when it comes to the balance sheet and cash flow.
First, Chevron reported a net-debt ratio of 21% for Q2 2021. That provides ample flexibility to pursue aggressive investments in exploration to benefit from higher oil prices.
Furthermore, the company reported operating cash flow of $7 billion for Q2 2021. Coupled with robust free cash flow visibility, this allows Chevron to pursue potential dividend growth and aggressive share repurchase.
It’s also worth noting that the company’s reserve replacement ratio has averaged 99% over the past few years. With a long reserve life and low break-even assets, Chevron is positioned for long-term value creation.
Just to put things into perspective, Chevron reported positive cash flows for 2020, even after oil prices plunged due to the pandemic.
Overall, CVX stock seems positioned for further rally in 2022. This is likely to be backed by strong cash flows and possible dividend growth.
Year-to-date in 2021, AAPL stock has been relatively subdued. During this period, the stock has trended higher by 23%. At a forward price-to-earnings-ratio of 26.4x, a break-out on the upside seems imminent for this cash flow king.
An important note is that Apple has continued to deliver strong numbers. For the fourth quarter of 2021, the company reported revenue growth of 29% to $83.4 billion. This was a new record for the September quarter.
Diversified growth is also encouraging from a long-term perspective. Unsurprisingly, the iPhone segment remains the cash flow driver. However, Apple reported healthy growth in the wearable and services segment.
In the near term, sales of the iPhone 13 are likely to ensure that growth remains robust. At the same time, Apple is looking for further diversification with a cash glut. A rumored entry into the electric vehicle segment is also an impending catalyst.
It’s also worth noting that the Americas, Europe and Greater China remain the revenue drivers in terms of regional breakdown. However, for the last 12-months, revenue growth from rest of Asia Pacific has been a strong 34%. There seems to be ample scope for penetration in emerging markets like India, among others.
Overall, AAPL stock remains attractive from the perspective of stock upside. Additional dividend growth is likely on a sustained basis considering the cash flows.
Best Blue-Chip Stocks to Buy: Walmart (WMT)
The economy of the United States is primarily driven by consumption, a key part of which is retail spending. Any list of blue-chip stocks would be incomplete without some nod to that fact.
WMT stock, which has trended downward by 5% in the last 12-months, seems like an attractive retail stock to consider, especially when you consider markets still trade near all time highs. WMT stock is a low-beta name and is worth adding to the portfolio in anticipation of any broad market correction.
When it comes to the business, Walmart has aggressively pursued omni-channel sales strategy. For the current year, the company is on-track to deliver $75 billion in global ecommerce sales.
In a world that’s increasingly shifting to online shopping, that’s a big reason to be bullish. For Q2 2022, the e-commerce segment in the United States had a 20-basis points contribution to comparable store sales growth.
Walmart bought a 77% stake in Flipkart (India) in 2018. The Indian e-commerce major was valued at $37.6 billion as of July 2021, valuing Walmart’s stake at nearly $29 billion. More importantly, India is still at an early stage of ecommerce growth. Walmart is positioned to benefit from presence and growth in key emerging markets.
TSLA stock has witnessed a sharp rally of late. In just the past one-month, the stock has trended higher by 27%. Yet it still seems that the stock is positioned for further upside in 2022.
Loup Ventures analyst Gene Munster recently opined that Tesla could become a $Gene Munster trillion company. Gene believes that Tesla has the potential to expand its revenue from $70 billion to $400 billion in the next 5 years.
This seems entirely likely considering two important factors.
First, electric vehicle adoption is still at an early stage in most parts of the world, with immense scope for revenue growth. According to Deloitte, electric car sales are likely to grow at a CAGR of 29% through 2030.
Second, Tesla has gigafactories in the United States and China, with a third in Europe likely to commence deliveries in 2022. The company has strong production capabilities and the market is at an inflection point of growth.
Another important point is that Tesla reported free cash flow of $1.3 billion for Q3 2021. Considering the revenue growth outlook, Tesla is well positioned to deliver FCF in excess of $5 billion on an annualized basis. This will provide financial headroom for investments and innovation.
Overall, TSLA stock is worth buying on corrections and is among the top blue-chip stocks to hold for 2022 and beyond.
Best Blue-Chip Stocks to Buy: Microsoft (MSFT)
MSFT stock is also among those blue-chip stocks that witnessed a strong rally in 2021. However, with strong business momentum, the stock is likely to remain in an uptrend.
Recently, Microsoft reported results of Q1 2022. The company’s revenue growth was 22% at $45.3 billion. It’s worth noting that Microsoft Cloud reported revenue growth of 36% for the quarter to $20.7 billion.
Clearly, the cloud business growth has remained strong, contributing nearly 50% of total revenue. The cloud business is likely to ensure that top-line growth remains robust.
It’s also worth noting that Microsoft reported cash and equivalents of $130 billion as of September 2021. Earlier this year, the company acquired Nuance Communications. The acquisition will help the company accelerate its cloud strategy for healthcare. With a strong cash buffer, it’s likely that Microsoft will continue to pursue acquisitions to drive growth.
Microsoft returned $10.9 billion to shareholders in Q1 2022 through dividends and share repurchase. Considering the cash flows and the balance sheet health, aggressive repurchasing should continue.
Lockheed Martin (LMT)
The defense sector is relatively immune to economic shocks. Even during the pandemic, global defense spending increased to touch nearly $2 trillion in 2020.
Among defense stocks, LMT stock looks attractive. Currently, the stock trades at a forward P/E of 13.4x, with a robust dividend yield of 3.37% and sustainable dividends.
For Q3 2021, Lockheed reported sales of $16 billion. The company has guided for $67 billion in sales for 2021 and $66 billion in sales for 2022. The current order backlog of $135 billion provides clear revenue visibility.
An important point to note is that Lockheed has guided for operating cash flow of $8.3 billion and $8.4 billion for 2021 and 2022, respectively. This is likely to ensure that dividends sustain in addition to continued share repurchase.
From a backlog growth perspective, Lockheed has seen significant growth in orders from outside the United States. With NATO allies still falling short of the defense spending target, it’s likely that order intake will remain strong.
Overall, LMT stock has been an underperformer over the last 12-months. The stock trend is likely to reverse in 2022 as markets search for value.
Best Blue-Chip Stocks to Buy: Pfizer (PFE)
PFE stock is another undervalued name among blue-chip stocks that can potentially rally in 2022. The stock currently trades at a forward P/E of 10.8x and offers investors a dividend yield of 3.57%.
For Q2 2021, Pfizer reported robust revenue growth of 86%, which was largely driven by the Covid-19 vaccine. But even without the impact of the vaccine, revenue growth was 10%. Furthermore, with a deep pipeline of drugs, Pfizer expects revenue growth at a CAGR of 6% through 2025.
An important point to note is that for 2021, Pfizer expects revenue of $33.5 billion from the Covid-19 vaccine. The company expects to deliver 2.1 billion doses of the vaccine through the year. Additionally, Pfizer has boosted its manufacturing capacity to 3 billion doses for 2022.
Recently, the company received U.S. Food and Drug Administration approval for the use of Covid-19 vaccine in children aged 5-11 years. This is likely to ensure that cash flow from Covid-19 vaccine sales remains strong through 2022.
In terms of growth, Pfizer recently acquired Trillium Therapeutics for $2.26 billion, an acquisition that diversifies the company’s oncology pipeline. With strong cash flows expected in the coming quarters, Pfizer has financial flexibility for acquisition driven growth.
With renewed global economic growth and accelerating inflation, I would also be remiss not to include a commodity stock in my list of blue-chip stocks. FCX stock has trended higher by more than 80% in the last 12-months. However, at a forward P/E of 14x, the stock looks attractive for further upside.
Freeport-McMoRan is also attractive with copper emerging as a key investment theme. Be it electric cars or renewable energy, the application of copper is likely to increase in the coming decade. The company seems well positioned to benefit from this tailwind.
With higher copper sales and realization, Freeport-McMoRan reported adjusted EBITDA of $3 billion for Q3 2021. For the same period, the company’s net-debt declined to $2 billion. With a strong balance sheet, capital expenditure is likely to remain aggressive. At the same time, dividends are sustainable.
Another important point to note is that Freeport-McMoRan expects higher copper sales in 2022 and 2023. At a $5 per pound copper price, the company has guided for EBITDA of $17 billion. With a robust outlook for 2022, FCX stock is likely to remain in an uptrend.
Best Blue-Chip Stocks to Buy: JP Morgan Chase (JPM)
I believe that banking stocks are also likely to be among the outperformers in 2022. JPM stock is attractively valued at a forward P/E of 11.3x and offers an annualized dividend of $4 per share to boot.
It’s also worth noting that the first rate-hike after the pandemic is likely to occur in 2022. As economic activity trends towards potential GDP, the banking sector is likely to benefit with growth in the core banking business.
To keep things in perspective, JP Morgan reported net interest income of $13.2 billion for Q3 2021. For the same period, the company’s non-interest revenue was $17.3 billion.
Investment banking and wealth management divisions have been cash flow drivers in a low interest rate environment. Going forward, it’s likely that interest income will increase. This is a key trigger for JPM stock upside.
It was recently reported that U.S. regulators are exploring the possibility of banks holding cryptocurrencies. Any meaningful progress on this front can be considered another upside catalyst for the banking sector. Looking at current valuations, JPM stock might be positioned for another rally relatively soon.
AMZN stock has been another underperforming name among blue-chip stocks in 2021. However, there is no doubt that the stock is likely to remain in a long-term uptrend.
Recently, Amazon reported Q3 2021 results and there are several positive factors to talk about. Net sales increased by 15% on a year-over-year basis to $110.8 billion. Importantly, the sales growth momentum has sustained for Amazon Web Services (39% YOY growth). AWS is likely to remain a key growth driver in the coming quarters.
It’s also worth noting that for the last twelve-months, the company reported operating cash flow of $54.7 billion. With strong cash flows, the company has the financial flexibility to pursue organic and acquisition driven growth. Over the past year, Amazon has spent $34.9 billion in acquisitions.
On the flipside, most retail companies are pursuing an aggressive omni-channel growth strategy. The competition in the e-commerce space seems to be intensifying. However, Amazon has continued to invest in service and technology. Further, with presence in several emerging markets, the company’s e-commerce segment will remain a cash flow generator.
Overall, it seems likely that AMZN stock will trend higher in 2022 after a meaningful period of consolidation.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of 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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.