Investors are continuously searching for undervalued asset classes and investment ideas. This translates into a quick money flow between asset classes and stocks toward value. A simple strategy for capital preservation and healthy returns is to wait patiently to invest in undervalued ideas. This column focuses on undervalued blue-chip stocks likely to turn red-hot in the coming quarters.

I have focused on precious metals, commodities and the energy sector to identify undervalued blue-chip ideas. The reason is impending rate cuts in the next few quarters. In general, expansionary policies translate into the flow of funds into risky asset classes. Commodities and energy prices tend to trend higher. At the same time, the gold trend has been bullish, and potential rate cuts would imply a further upside.

I have discussed quality undervalued blue-chip stocks trading at a valuation gap with this policy view. These ideas’ total returns will likely be robust in the next 12 to 18 months.

Newmont Corporation (NEM)

For year-to-date, gold has trended higher by almost 12%. Newmont (NYSE:NEM) stock has remained sideways for the same period. This is a good opportunity to accumulate the gold miner with a bullish outlook for the precious metal.

For the first quarter of 2024, GDP growth in the United States weakened to 1.6%. Even with relatively stubborn inflation, it’s likely that the first-rate cut is coming before the end of 2024. This positions gold for further upside.

Specific to Newmont, the first positive is an investment grade balance sheet. The company ended Q1 2024 with a cash buffer of $2.7 billion. Further, operating cash flow for the quarter was $776 million. With gold trending higher, OCF will likely swell, and Newmont will be positioned to increase dividends.

From a long-term perspective, Newmont ended 2023 with 136 million ounces of gold. This provides clear production and cash flow visibility for the coming years. NEM stock, therefore, looks attractive at a forward price-earnings ratio of 17.4.

Occidental Petroleum (OXY)

Occidental Petroleum (NYSE:OXY) stock was red-hot when Warren Buffett was mopping up the company’s shares. However, with macroeconomic headwinds and weakness in oil, OXY stock has remained subdued. This is a good buying opportunity, with the blue-chip stock looking undervalued.

An important point is that expansionary monetary policies are coming relatively soon. It’s likely to have a positive impact on energy prices. This is a key catalyst for OXY stock to trend higher in the next few quarters.

The first point that’s worth highlighting is the cash flow potential. For 2023, Occidental reported operating cash flow of $5.5 billion. With robust cash flows and an investment-grade balance sheet, Occidental has high flexibility for dividends, share repurchases, and aggressive capital investments.

The second positive is that Occidental ended 2023 with reserves of four billion barrels of oil equivalent. Last year, the company reported a robust reserves replacement ratio of 137%. The asset base provides steady production growth visibility. OXY stock is likely to go ballistic if this is coupled with higher oil trends.

Vale (VALE)

In general, the cyclical nature of business makes investors avoid industrial commodities. However, if the timing is right, commodity stocks can quickly deliver multibagger returns. Vale (NYSE:VALE) is among the most undervalued industrial commodity stocks to buy for healthy returns.

To put things into perspective, VALE stock trades at a forward price-earnings ratio of 7. Further, the stock offers a dividend yield of 8.7%. It’s worth noting that iron ore has been trending higher in the recent past. Further, the potential expansionary policies will likely support the upside in commodities. I am, therefore, bullish on a big rally for VALE from oversold levels.

It’s worth noting that for Q1 2024, Vale reported the highest iron ore production since 2019. At the same time, copper and nickel production increased on a year-on-year basis. Further, Vale reported EBITDA and free cash flow of $3.5 billion and $2 billion for the quarter.

With an annual FCF potential of $8 billion, Vale is positioned to sustain dividends. Additionally, a strong balance sheet and healthy cash buffer provide flexibility to invest in boosting the production of energy transition metals like copper and nickel.

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.