It’s not just big tech stocks that have experienced a pullback lately. Many other highly-followed stocks have as well, including some of blue-chip stocks. Blue-chips may be known for their consistency and perceived lower levels of risks, but many investors have in recent months become fairly cautious about many names in this category.
In some cases, concerns have to do with valuation. Although the Federal Reserve is still expected to begin lowering interest rates later this year, some valuation-conscious investors are worried that specific blue-chips are becoming overvalued relative to long-term growth, and have trimmed exposure to them accordingly.
In other cases, concerns have more to do with sector or company-specific headwinds that may affect financial results down the road. For instance, companies that are still contending with issues like high inflation. In certain industries, this factor continues to affect consumer demand and spending.
However, while some blue-chip stocks have sold off for good, that’s not the case with the following seven stocks. Investor pessimism has pushed each one to a relatively low valuation. You may want to consider buying each one, as today’s low prices may not necessarily last for long.
Archer-Daniels-Midland (ADM)
Archer-Daniels-Midland (NYSE:ADM) is among the world’s top agribusiness companies. It’s involved in many aspects of food production, from the processing and transport of agricultural raw materials, to the production of oilseeds and other food products. Yet while people need to eat, even in a recession, it’s been far from smooth sailing for Archer-Daniels-Midland shares.
ADM stock has declined sharply since 2022, due demand and price weakness in the food commodity markets. That’s not all. Back in January, shares took a nosedive, when an accounting scandal emerged. This issue largely entered the rearview mirror back in March. However, food commodities prices, boosted higher by the supply shocks that resulted from Russia’s initial invasion of Ukraine in 2022, have fallen back to 2021 levels.
As a result, the company has experienced a drop in profitability. Even so, now may be an opportune time to “buy the dip” with ADM. Shares trade for only 11.7x forward earnings. Even if food prices fail to spike again, cost cutting efforts may lead to $500 million in cost savings over the next two years. ADM is also aggressively buying back stock. Back in March, the company announced plans to buy back $1 billion worth of its own shares.
Clorox (CLX)
Blue-chip stocks in the healthcare sector are still getting over post-Covid hangovers, but so too is Clorox (NYSE:CLX), the household products giant best known for its eponymous brand of disinfectant products. Clorox shares have fallen considerably since the pandemic. Alongside declines in cleaning product sales, Clorox has been affected by inflation’s squeeze on margins, as well as the fallout from a cyberattack in 2023.
But while CLX stock has continued pullback, there may still be merit in entering a long-term position at current prices. Issues resulting from the cyberattack have largely been resolved. Clorox sales may not re-hit pandemic-era levels anytime soon, but forecasts call for the company to report 9.3% earnings growth during the fiscal year ending June 2025.
That’s a far greater level of earnings growth than what analysts are expecting for other household products stocks like Procter and Gamble (NYSE:PG). Yet while P&G sports a P/E in the mid-20s, you can buy Clorox for just 23 times forward earnings. If results meet or beat expectations, shares in this company, which is also a “dividend aristocrat” with a 3.55% annual yield, could surge on both earnings growth and multiple expansion.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) was off to a strong start in the beginning of 2024. From January to April, shares in the entertainment conglomerate surged from $90 to over $120 per share, as a proxy contest launched by activist investor Nelson Peltz brought greater attention to, and appreciation of, Disney’s streaming-focused turnaround efforts.
However, since April, shares have coughed back most of these gains. DIS stock is now back to under $100 per share. Weak quarterly results have again cast doubt on whether this “old school” media company can profitably adapt to permanent changes in content consumption. Peltz’s decision to cash out of DIS near its 52-week high suggests that shareholder activism won’t be serving as a catalyst again anytime soon.
Yet while DIS is again out of favor among investors, this could work in your favor if you’ve been waiting to enter a long-term position in this blue-chip. It may take time, but the company could prevail in its efforts to increase engagement with its streaming platforms. This may in turn enable Disney to retain and grow its userbase. In turn, turning streaming into a profit center, leading to renewed bullishness and a surge back toward prior price levels.
McDonald’s (MCD)
Back in May, I made the case for McDonald’s (NYSE:MCD) being one of the blue-chip stocks to buy on the dip. In a nutshell, I argued that issues like the fast food giant’s sales slump, driven by factors like customer fatigue with high prices, as well as an overseas boycott of McDonalds related recent Middle East conflict, would prove temporary.
Admittedly, while other commentators have expressed a similar view, such a take hasn’t been widely adopted by the market. As seen the sideways performance of MCD stock since mid-May, investors are by-and-large still taking a “wait and see” view. Still, while skepticism about a McDonald’s comeback remains high, don’t assume that the company is in some sort of long-term decline. As Morgan Stanley’s Brian Harbour recently argued, the company’s sales slump is likely to continue in the near term.
However, Harbour has maintained an “overweight” price target, and a $300 per share price target on MCD, citing that the company’s competitive advantages give it a greater chance of “rebuilding its value reputation” compared to other fast food chains. With this, you may still want to go against the grain, and make a contrarian wager on the “Golden Arches.”
Medtronic (MDT)
Medtronic (NYSE:MDT) shares have experienced a modest dip in price since May, when this leading medical device manufacturer last reported fiscal results. Results for the preceding quarter were more-or-less mixed, and guidance came in weaker-than-expected.
But while MDT stock has declined in walked-back expectations, these may now be more-than accounted-for in its valuation. Shares today trade for only 14.6 times forward earnings. This represents a sharp discount to peers. Becton Dickinson (NYSE:BDX), for instance, trades for 17.6 times forward earnings, while other medical device names sport forward price-to-earnings (P/E) ratios in the 20-30 range. That’s not to say that Medtronic should, or will, eventually re-hit the loftier valuations it has traded at historically.
However, if results do come in better-than-feared in the quarters ahead, a move back to a valuation in line with that of BDX may be within the realm of possibility. Sell-side consensus calls for MDT’s earnings to hit $5.81 per share during the fiscal year ending April 2026. If this happens, and at the same time shares re-rate to the aforementioned valuation range, this $80 stock could by then be back to triple-digit price levels.
Nike (NKE)
Nike (NYSE:NKE) has become one of the blue-chip stocks to buy on the dip following a pullback driven by changing expectations of the apparel and footwear company’s future growth prospects.
NKE stock tanked after its latest quarterly earnings release on June 27. Nike’s reporting of lower-than-expected revenue and guidance led to an immediate price drop of nearly 20%. So far in July, shares have drifted to new multi-year lows. Yet while this widely-followed blue-chip may look right now like a falling knife, diving in today could prove profitable, not perilous. The recent sell-off has pushed NKE to a forward valuation in the low-20s, with a 2.04% forward dividend yield.
Nike has increased its dividend by an average of 11% annually over the past five years. Over a long time frame, these payouts could provide a significant boost to total returns. In terms of a price rebound, while the market now anticipates a long road ahead to recovery, that may not necessarily be the case. As InvestorPlace’s Tyrik Torres recently argued, near-term catalysts like the upcoming 2024 Summer Olympics could pave the way for stronger results. In turn, this may drive a sooner-than-expected recovery for shares.
PepsiCo (PEP)
So far, I’ve talked about quite a few blue-chips felled by poorly-received quarterly results. In the case of PepsiCo (NASDAQ:PEP), however, one can argue that the opposite is playing out. That is, the soft drink and snack food giant’s latest quarterly results are helping to get PEP back on an upward trajectory.
Yes, PEP stock initially pulled back following the July 11 earnings release. Results were mixed, with a reported revenue miss. However, earnings exceeded expectations. Also, commentary from CEO Ramon Laguarta suggests that the company is looking to bring out lower product prices to boost demand. If the company can get back on track with sales growth, all while maintaining high single-digit annual earnings growth, investor enthusiasm could return to PEP.
Improving sales growth may even be enough to bridge the valuation gap between PEP and its chief competitor Coca-Cola (NYSE:KO). PEP trades for 20.7 times forward earnings, versus KO’s forward multiple of 23.1. If this were to happen, given forecasts calling for annual earnings of $8.77 per share in 2025, within a year PEP, now trading for around $169.50 per share, could hit prices topping $200 per share.
On the date of publication, Thomas Niel 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
