Blue-chip stocks are like the foundation blocks of a portfolio. These strong low-beta stocks cushion the portfolio from market volatility and provide steady returns.

Finding blue-chip stocks trading at a valuation gap is a relatively challenging task. When that opportunity arises, investors must act quickly. Undervalued blue-chip stocks may offer returns comparable to growth stocks.

The focus of this column is on three blue-chip stocks that trade under $20. These low-price stocks provide scope for creating a portfolio of blue-chip names with a small capital. Further, considering the valuations, I believe these stocks can deliver 25% to 50% returns in the next 12 months.

I would not hesitate to hold these stocks for longer if the business developments remain positive. Let’s discuss the reasons to be bullish on these blue-chip stocks to buy.

Barrick Gold (GOLD)

Barrick Gold (NYSE:GOLD) seems attractive among blue-chip stocks after remaining sideways for the last 12 months. GOLD stock trades at an attractive forward price-earnings ratio of 21.9 and offers a dividend yield of 2.2%.

From a financial perspective, Barrick Gold reported operating cash flow of $2.7 billion for the first nine months of 2023. This already implies an annualized OCF of $3.6 billion.

A higher gold trend would result in an OCF of at least $4.5 billion in 2024. This sets the stage for dividend growth and potential exploration expenditure acceleration.

I must add here that as of December 2022, Barrick reported proven and probable mineral reserves of 76 million ounces. The company’s reserve replacement has been over 100% and a strong asset base provides long term cash flow visibility.

Vale (VALE)

Another blue-chip stock that has remained sideways in the last 12 months is Vale (NYSE:VALE).

At a forward price-earnings ratio of 8, the stock looks undervalued and poised for a breakout rally. Further, VALE stock has a dividend yield of 5%.

Like precious metals, I expect industrial commodities to trend higher in 2024 on the back of potential rate cuts. As a leading iron ore company, it’s likely the financial metrics will be robust in the coming quarters.

For Q3 2023, Vale reported EBITDA of $4.5 billion. Even at this rate, it positions the company for annualized EBITDA of $18 billion. For the coming year, EBITDA is likely to be more than $20 billion on the back of higher commodity prices. This will provide Vale with ample flexibility for aggressive investments and potential dividend growth.

I must also add that Vale is focusing on investing in metals that will support global energy transition. This includes copper and nickel. From a long-term perspective, these metals will add value in terms of growth and cash flow upside.

AT&T (T)

AT&T (NYSE:T) stock has failed to gain momentum, even with improving business and financial metrics.

However, I expect the stock to rally considering a forward price-earnings ratio of 6.8 and a dividend yield of 6.7%.

It’s worth noting that 21 analysts offering 12-month price forecasts for AT&T Inc have a median target of 18.10.

This would imply a stock upside potential of 9.37%. If we add the dividend yield, total returns are likely to be 16%. Total returns of 25% seem likely considering the deep valuation gap.

Coming to the financials, AT&T reported free cash flow of $10.4 billion for the first nine months of 2023. The annual FCF potential is $13.9 billion, AT&T can deliver and sustain dividends. The company has already made some big investments in its 5G network. This will continue to yield positive results in the coming years.

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.