If growth stocks trigger an adrenalin rush, blue-chip stocks ensure calm. These stocks are a portfolio’s fortress, guarding against extreme volatility and capital erosion. Therefore, if I find undervalued blue-chip stocks, I would not hesitate to consider exposure.
There can be temporary industry or company-specific headwinds that depress valuations for blue-chip companies. However, it’s unlikely that high-quality companies will trade at a valuation gap for an extended period. Considering exposure to undervalued blue-chip ideas would, therefore, translate into robust total returns.
This column focuses on three blue-chip stocks representing quality businesses with healthy cash flow potential. The sector focus is on industrial commodities, energy and precious metals. The reason is that I expect the Fed to pursue multiple rate cuts in the next 18 months. Further, central banks globally are moving towards expansionary monetary policies. I therefore expect companies from the above sectors to benefit.
Let’s discuss the fundamental reasons for the bullishness of these undervalued blue-chip stocks.
Vale (VALE)
Vale (NYSE:VALE) is among the most undervalued blue-chip stocks to buy. After a 15% correction in the last 12 months, VALE stock trades at a forward P/E of 4.7. Further, the commodity stock offers a robust dividend yield of 9.7%.
It’s worth noting that the European Central Bank has already cut rates to boost GDP growth. Multiple rate cuts are likely in the next 12 to 18 months. The Fed is expected to take expansionary policy action before the end of the year, which is a key catalyst for VALE stock in the coming quarters.
Specific to Vale, the commodity major reported adjusted EBITDA of $3.5 billion for Q1 2024. Even with macroeconomic headwinds, the company will likely deliver an annual EBITDA of $13 to $15 billion. Cash flow visibility is, therefore, robust and will ensure that dividends are sustained. At the same time, Vale will continue to invest aggressively in producing metals that support the global energy transition. It’s, therefore, a good time to consider VALE stock.
Chevron (CVX)
Chevron (NYSE:CVX) is an undervalued oil and gas exploration company. CVX stock has remained sideways in the last 12 months due to subdued oil prices. This is a good buying opportunity, as the energy stock also offers a robust dividend yield of 4.18%.
The rate cut factor I discussed for Vale also applies to Chevron. As expansionary policies support GDP growth, oil will likely trend higher.
It’s worth noting that Chevron has an investment-grade balance sheet. As of Q1 2024, the company reported a net-debt ratio of 8.8%. This provides high financial flexibility to pursue aggressive exploration investments. For Q1, Chevron reported capital expenditures of $4.1 billion. The oil major is on track for annual investments of more than $15 billion.
Another note is that Chevron has attractive assets with a low break-even. This is likely to ensure robust cash flows. To put things into perspective, Chevron reported operating cash flow of $6.8 billion for Q1 2024. Assuming that oil trends higher, the annual OCF potential is more than $30 billion. I must add that the acquisition of Hess will have an incremental impact on cash flows.
Newmont (NEM)
Newmont (NYSE:NEM) stock has been underperforming and has remained sideways in the last 12 months. During the same period, gold has trended higher by 17.5%. I expect a strong comeback for NEM stock in the coming quarters from undervalued levels.
The first point is that gold is consolidating around $2,300 an ounce. I expect a fresh rally that’s likely to be triggered by expansionary monetary policies. It would not be surprising if the precious metal trades above $2,500 an ounce. Newmont will be positioned to benefit from higher realized gold prices and, therefore, robust cash flows.
Newmont has 128 and 155 million ounces of gold reserves and resources, respectively. The gold miner also has 14 and 28 metric tons of copper reserves and resources, respectively. A high-quality and diversified reserves base provides steady production visibility.
Newmont has an investment-grade balance sheet, which allows the company to invest aggressively in exploration expenditures. Additionally, as cash flows swell, dividend growth will likely remain robust.
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.
