As the S&P 500 index trends higher, spotting undervalued blue-chip stocks is relatively challenging. A dovish fed and a declining possibility of a recession have supported an improvement in market sentiment. I believe the markets will likely remain in an uptrend, with global economic activity expected to improve further in 2024.
Of course, a meaningful market rally for year-to-date does not imply that stocks are overvalued. On the contrary, several stocks trade at a valuation gap. At some point in time, these fundamentally strong blue-chip stocks will rally.
I would therefore accumulate these undervalued stocks with an initial time horizon of 12 to 24 months. Considering the valuation gap, these stocks will likely beat index returns during the time horizon. Let’s discuss the reasons to be bullish on these stocks.
AT&T (T)
AT&T (NYSE:T) stock has underperformed with a deep correction of 28% for year-to-date. However, I believe the stock is significantly oversold at a forward price-earnings ratio of 5.5. The stock also offers an attractive dividend yield of 8.2%.
I believe that the company’s results have been encouraging, and the stock reversal is likely to be sharp. For Q1 2023, AT&T reported steady revenue and EBITDA growth from the mobility segment. Importantly, the average revenue per user trended higher by 2% yearly. With growing 5G adoption, I expect the ARPU trend to remain positive, supporting cash flow growth.
It’s worth noting that AT&T is a deleveraging story. Last year, the company reduced net debt by $24 billion. I expect deleveraging and improvement in credit metrics to continue. Earlier this year, it was reported that AT&T is looking to sell its cybersecurity business. That’s an impending catalyst for T stock upside as it’s likely to support accelerated deleveraging.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock is another grossly undervalued blue-chip name that’s worth considering for healthy returns. A dividend yield of 4.53% is also attractive, and I expect steady growth in the coming years.
Uncertainties related to growth after the pandemic is one reason for PFE stock correction. The impact of drugs going off-patent is another reason the markets are nervous. However, I believe these factors are discounted with PFE stock trading at a forward price-earnings ratio of 10.9.
To boost sales, Pfizer has been investing aggressively in research and development. With a deep pipeline, the company expects $20 billion in incremental revenue from new molecular entities by 2030. Further, new business developments will translate into $25 billion in incremental revenue by 2030. As the company builds a strong foundation for the next phase of innovation and growth, PFE stock is a buy-and-hold.
Vale (VALE)
Among commodity blue-chip stocks, Vale (NYSE:VALE) is massively undervalued. The 2.87% dividend yields stock trades at a forward price-earnings ratio 6.1. I would not be surprised if VALE stock doubled in the next 24 months.
From a macroeconomic perspective, the International Monetary Fund expects global GDP growth to accelerate in 2024 as compared to 2023. Further, a potentially weaker dollar is likely to be positive for commodities. The worst in terms of price realization might therefore be over for Vale.
I also like the point that Vale is looking at diversification. With high financial flexibility, the company’s investment in copper and nickel mining will likely accelerate. Reshaping the portfolio towards metals likely to benefit from the energy transition will support Vale’s growth.
From a financial perspective, Vale reported an adjusted EBITDA of $3.7 billion for Q1 2023. This implies an annual EBITDA potential of $15 billion. Internal cash flows are likely to fund investments and dividends.
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.
