As we enter the month of May 2023, it might be time to consider some undervalued blue-chip stocks to buy. So far, growth sectors such as information technology, communications and discretionary have had solid year-to-date gains. However, given the impending slowdown, it might be the opportune time to be more conservative.
There is no better way to play defense than adding bargain blue-chip stocks to your portfolio. No question, value has underperformed growth over the last decade. But given growing forecasts for stagflation, higher rates and continuing geopolitical turmoil, markets might be due for a value resurgence.
Blue-chip stocks are large, established companies with a history of consistent earnings and dividend payments. They are an attractive option for investors seeking stability and income. These companies operate in industries that support stable demand throughout the economic cycle. Generally, they are strong business franchises that generate robust cash flows.
In this article, we will take a closer look at three blue-chip stocks that could be undervalued and offer a strong investment case.
Wells Fargo (WFC)
As the banking turmoil continues, bank investors are in a lot of pain. Investors are selling first and asking questions later. Given the volatility in banks, seeking safety in the best undervalued blue-chip stocks within the sector is advisable.
Due to the indiscriminate selling, strong banking franchises like Wells Fargo (NYSE:WFC) are emerging as value plays. Unlike regional banks facing questions about funding costs, the bank is in pristine shape. It is the fourth-largest bank in the U.S., with a nationwide branch presence. This strong retail franchise enables it to have one of the lowest deposit costs in the industry.
The bank had a challenging decade from its cross-selling scandal and the ensuing regulatory scrutiny. Today, these legacy problems are still an overhang on the stock, particularly the $1.95 trillion asset cap by the Federal Reserve. Gradually, the company is making progress in addressing these regulatory issues. For instance, in December 2022, it settled with the Consumer Financial Protection Bureau (CFPB) for $3.7 billion.
Since the asset cap restriction, Wells Fargo has focused on improving its efficiency and streamlining its operations. These initiatives have led to an improved operating ratio. Analysts hope the Fed will eventually lift its asset cap as Wells Fargo works through the remaining consent orders. A quick look at analyst research on the stock reflects this. The current consensus rating is a strong buy, with an average price target representing a 20% upside.
And the bullish analyst view is also backed by a cheap valuation. Wells Fargo is trading at a relatively low price-to-book (P/B). At the end of 1Q 2023, the book and tangible book value per share were $43.02 and $35.87, respectively. Finally, besides the low P/B, the bank has an attractive 3% yield.
Exxon Mobil (XOM)
While oil and gas prices are highly cyclical, Exxon Mobil (NYSE:XOM) has a long-term track record of success. One of the company’s key strengths is its diversified portfolio of assets. Its operations span upstream and downstream operations, chemicals and lubricants. This portfolio mix helps to mitigate oil and gas volatility risks and provides a source of stable earnings.
After a challenging pandemic period, when oil crashed to below zero, business is booming. In the past two years, the company has benefited from higher oil prices. However, the company isn’t relying on commodity inflation alone for revenue growth.
It has been increasing production, as highlighted in its latest earnings. Exxon reported increased oil production by 160,000 oil-equivalent barrels per day year-over-year (YOY). “We are growing value by increasing production from our advantaged assets to meet global demand,” noted Darren Woods, the CEO.
Going forward, the company is focused on maintaining operating cost discipline. Based on current guidance, the company plans to double earnings and cash flow by 2027 from 2019 levels. To achieve this, it is growing its chemicals, upstream, and downstream segments, optimizing its portfolio and undertaking cost reductions.
Over the next five years, management plans to generate $100 billion in surplus cash after capital expenditure and dividends. Exxon has been a dividend grower, raising its annual dividend for 39 consecutive years. Management expects to increase shareholder distributions through dividends and buybacks.
Despite the solid one-year performance, Exxon Mobil is cheap, trading at a trailing price-to-free-cash-flow of 10. Its ability to navigate commodity cycles plus the reasonable valuation reveals one of the most undervalued blue-chip stocks to buy. Moreover, its ongoing investments in innovation and sustainability make it an attractive investment opportunity for the long term.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is the world’s largest and most diverse healthcare company. It operates through three divisions: pharmaceuticals, medical devices and consumer healthcare products. The pharmaceutical and MedTech divisions are the primary revenue generators, accounting for 80% of sales.
Recently, the company announced a spinoff of its smallest division, the consumer unit. The segment produces a range of products that cater to consumers’ everyday health and wellness needs. This includes over-the-counter medicines, such as Tylenol and Motrin, as well as skincare and beauty products, such as Neutrogena and Aveeno. This deal will unlock value for shareholders and create a more focused Johnson & Johnson.
Recent lawsuits have negatively impacted the company, making it one of the top undervalued blue-chip stocks to buy. Since last year, JNJ stock has been weighed down by claims that its baby powder caused cancer. Now the company is moving to put these issues in the rearview mirror. In April, the company proposed the largest product-liability settlement in U.S. history. Under the proposal, the company set aside $9 billion to pay claims for the various talc suits.
Despite these short-term challenges, the company is in great financial shape. As of April 2, it held $19 billion in cash on its balance sheet. Furthermore, its drugs and consumer products are everyday necessities that consumers can’t go without.
As the talc lawsuits resolve and the spinoff unlocks value, Johnson & Johnson will reprice higher. For now, the company is a cheap blue-chip stock trading at a relatively low forward price-to-earnings (P/E) ratio of 15. Meanwhile, you can sit back and enjoy the healthy 2.88% dividend yield. The company has grown its dividend for 60 years. You can expect this streak to continue, given its balance sheet strength.
On the date of publication, Charles Munyi did not have (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.