- Oversold blue-chip stocks offer an attractive long-term entry point after the recent market correction.
- Apple (AAPL) — Undervalued considering the long-term earnings growth outlook. A quality blue-chip dividend growth stock.
- Pfizer (PFE) — Deep pipeline of drugs to boost long-term growth. The company is on an acquisition spree with robust cash flows from vaccine sales.
- British American Tobacco (BTI) — Core combustible business is the cash cow. Strong growth in the non-combustible segment. Deleveraged balance sheet.
- Costco (COST) — Margin compression is a concern for the retail industry as inflation surges. However, long-term growth outlook remains strong.
- Tesla (TSLA) — Several new models in pipeline will boost deliveries growth in the next few years. Robust long-term free cash flow potential.
As an investor, there is always a dislike for any deep market correction. In particular, if there are substantial long positions. However, it’s the market correction that provides an entry opportunity into growth stocks as well as oversold blue-chip stocks.
Patient investors are always ready with some cash buffer to take a fresh plunge on declines. Warren Buffett’s investment style always serves as a good example. In the first few months of 2022, Berkshire Hathaway has been on a shopping spree with nearly $51 billion in share purchases.
Over decades, the markets have been trending higher. This underscores the view of buying on dips. In the recent correction, growth stocks have been hammered and there are some attractive entry opportunities. At the same time, some blue-chip stocks have also corrected from all-time highs.
This column will focus on five oversold blue-chip stocks. These are well-established, large market capitalization companies, that have rewarded investors through dividends, share repurchases and stock upside. The correction therefore provides a good entry opportunity for the core long-term portfolio.
|BTI||British American Tobacco p.l.c.||$42.85|
|COST||Costco Wholesale Corporation||$422.93|
AAPL stock trades at a forward price-to-earnings-ratio of 23.2. Valuations look attractive considering the earnings growth potential. Additionally, the stock is among the quality dividend growth names to add to the portfolio.
In terms of business, iPhone remains the cash cow for Apple. With 5G phones, sales are likely to remain healthy. At the same time, Apple has diversified with growth in segments like wearable and services. These emerging segments have supported earnings growth.
With innovation in the forefront, the stock is likely to remain a value creator. Investors would also be eagerly waiting for more news on a potential electric vehicle. That’s another catalyst on the horizon. Apple has a robust cash buffer to make big investments in EV technology.
Overall, I expect AAPL stock to trend higher from current levels. Anything below $150 seems like a good entry point.
For year-to-date 2022, Pfizer Inc. (NYSE:PFE) stock has corrected by 10%. For a low-beta stock that’s undervalued, the correction is meaningful. The stock currently trades at a forward P/E of 7.6 and also offers investors an attractive dividend yield of 3.1%.
It’s worth noting that the company’s revenue growth will decelerate on a relative basis. A key reason is lower revenue from the vaccine against Covid-19. However, that’s not the only growth catalyst for the company.
Pfizer has a deep pipeline of drug candidates that will support growth in the next few years. Additionally, the company has a strong cash buffer for acquisitions. The company has already been on an acquisition spree in the last two quarters.
This will further boost the growth potential. As an example, the acquisition of ReViral has the potential to add $25 billion in risk-adjusted revenue to 2030 top-line expectations. Steady top-line and earnings growth would also imply potentially higher dividends.
PFE stock is therefore among the top names among oversold blue-chip stocks. Further, with increasing probability of a recession in 2023, the defensive stock is worth holding in the portfolio.
British American Tobacco
British American Tobacco p.l.c. (NYSE:BTI) is another stock that has not corrected very significantly from highs. However, at a forward P/E of 9.3x, the stock is attractive. In particular, with a dividend yield of 6.57% with that payout being sustainable.
British American is in a business transformation phase with increased focus on the non-combustible business segment. There are two important points to note here.
First and foremost, the company’s core tobacco business still remains the cash cow. While growth is muted, the segment cash flows are likely to remain robust.
Furthermore, the growth in non-combustible business has been encouraging. This segment revenue is already 12% of the group revenue and has been growing at a CAGR of 44% (2017 to 2021). The company expects new-category revenue to increase to five billion pounds by 2025.
The company has also deleveraged with healthy cash flows. At a debt-to-adjusted-EBITDA of 3.0x, the balance sheet looks strong. Therefore, the business developments have been positive and BTI stock seems poised for a break-out rally.
In April 2022, Costco Wholesale Corporation (NASDAQ:COST) stock had touched highs of $612. Currently, the stock is trading at $423, which implies a correction of about 30% from highs. I believe that it’s a good opportunity to accumulate the stock.
However, it’s worth noting that the consumption sector is the backbone of the U.S. economy. Retail spending is a key component of consumption spending. Retail stocks are likely to stabilize and trend higher again after discounting potential margin compression.
Specific to Costco, the company has reported sales of $130 billion for the thirty-one weeks ended April 3. On a year-on-year basis, sales growth was healthy at 16.7%. The company’s membership fee revenue has also increased over the years.
I also like the fact that Costco has been building strong omni-channel sales presence. Overall, the membership warehouse operator is well positioned for steady long-term growth. Near-term headwinds in the form of margin pressure provide a good opportunity to accumulate COST stock.
There has been a broad-based correction in electric vehicle stocks. Chip shortage, raw material inflation and surge in Covid cases in China are near-term headwinds. However, the industry has multi-year tailwinds and I expect a strong bounce-back for TSLA stock.
In terms of business developments, Tesla Cybertruck and Roadster are likely to be launched in 2023. The company has also opened order bookings for Tesla Semi. This will support deliveries growth in the next few years.
It’s also worth noting that Tesla already has a Gigafactory in Europe. With the region focused on reducing energy dependence on Russia, the outlook for accelerated adoption of EV is positive.
With operating leverage, Tesla has already been reporting healthy cash flows. In the next few years, free cash flows are likely to swell. This will take TSLA stock higher.
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.