It’s not uncommon to see blue-chip stocks trading at a valuation premium. The reasons include low-beta, dividends, share repurchase and stable cash flows. However, the markets tend to be sensitive to news or quarterly numbers. Therefore, temporary weakness in quality blue-chip stocks presents a good opportunity to buy quality names. This column focuses on blue-chip stocks to buy that trade at attractive levels after weak Q1 results.
As a long-term investor, focus on the vision for growth and value creation than numbers for every quarter. Even the best of companies can go through rough times. The secret to market success is adding quality stocks on the decline instead of panic selling. The stocks discussed represent companies with good fundamentals but near-term weaknesses. These ideas can deliver healthy returns once the macroeconomic or industry-specific headwinds are navigated.
Let’s discuss the reasons for being bullish when the markets are bearish.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) stock has declined by 27% year-to-date. The sharp correction has been on the back of weak quarterly numbers. Competition and macroeconomic headwinds have impacted Tesla’s growth and profitability.
The correction in TSLA stock is a good opportunity for accumulation. The company is an innovator and is likely to make a strong comeback. With potential rate cuts in the coming quarters, Tesla will benefit from lower interest rates.
Recently, Nvidia’s (NASDAQ:NVDA) CEO, Jensen Huang, opined that Tesla is “far ahead in self-driving cars.” That’s one possible area of massive value creation with robotaxis that will “make money for their owners and a driverless transportation network.”
Further, as competition intensifies, Tesla might look at its impending promise of low-cost cars. This will likely be a game-changer in emerging markets like Southeast Asia and India. With high financial flexibility, Tesla has the headroom to invest in new manufacturing facilities in countries like Indonesia and India.
Target (TGT)
Target (NYSE:TGT) stock had touched highs of $182 in April. However, there has been a meaningful correction from those levels, with TGT stock currently trading at $145. The correction has been largely on the back of mixed Q1 2024 numbers. I don’t see a further downside with TGT stock trading at a forward P/E of 15.5.
An important point is that consumption spending is a key growth driver for the U.S. economy. With GDP growth decelerating, multiple rate cuts will likely be pursued in the next 12 to 18 months. Target will likely benefit as lower money costs translate into higher consumption spending. From a macroeconomic perspective, this is a crucial reason for being bullish on TGT stock.
The second point to note is that Target has reaffirmed its guidance for the full year for comparable store sales growth of 0% to 2%. Further, the GAAP and adjusted EPS are expected at $8.6 and $9.6, respectively. The coming quarters are, therefore, likely to be good, and I expect a strong reversal rally toward the end of the year.
United Parcel Service (UPS)
United Parcel Service (NYSE:UPS) is another company that has posed mixed results for Q1 2024. With macroeconomic headwinds being a key factor, UPS stock has declined by around 12% for year-to-date. The 4.7% dividend yield stock trades at a forward P/E of 17 and looks attractive. The downside is, therefore, a good opportunity to accumulate this blue-chip stock.
For Q1 2024, UPS reported a decline of 5.3% in consolidated revenue on a year-on-year basis to $21.7 billion. At the same time, the company’s operating margin declined by 310 basis points to 8%. While the quarter numbers disappointed investors, there are two positives to note.
First, UPS has reaffirmed revenue guidance from $92 to $94.5 billion. Further, driven by operating efficiencies, UPS expects an operating margin of 10% to 10.6%.
It’s also worth noting that UPS reported a free cash flow of $2.3 billion. With an annual FCF potential close to $10 billion, UPS has ample flexibility to sustain 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.
