The general rule is that higher returns come with higher risk exposure. In equities, it would imply buying growth and penny stocks that have a relatively higher beta. However, there are time when low-beta blue-chip stocks can outperform growth stocks for a certain period. This can be due to industry or company specific catalysts. Further, there can be a case of blue-chip stock bargains where the valuation gap is deep. A potential reversal in sentiment can translate into robust returns in quick time.
A good example of industry or company specific trigger is Nvidia (NASDAQ:NVDA) stock. Backed by the growth in demand for artificial intelligence, the blue-chip stock has skyrocketed by 235% in 12 months. Similarly, Tesla (NASDAQ:TSLA) stock rallied from deeply oversold levels by 100% in the last 12 months.
The focus of this column is on blue-chip stock bargains that are likely to trend higher by 50% this year. Let’s talk about the business and financial metrics that back this bullish.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock trades at a forward price-earnings ratio of 6.3 after a correction of almost 40% in the last 12 months. The decline in ALB stock has been due to lower lithium prices.
However, valuations indicate that the downside is overdone and I am bullish on a strong rally from current levels of $136. As a matter of fact, ALB stock touched lows of $112 in November 2023. The stock is already higher by 21% from the lows. I expect the positive momentum to sustain.
There are two important points to note in the downturn. These are also the factors to be bullish on ALB stock.
First, Albemarle has strong fundamentals and with a leverage of 1.2 coupled with cash and equivalents of $1.6 billion, I don’t see any financial stress.
Further, Albemarle is preparing a strong base for stellar revenue growth once lithium reverses potentially in the second half of the year. Between 2022 and 2027, the company is targeting tripling of lithium conversion capacity. This will translate into robust growth and cash flows in the next few years.
AT&T (T)
AT&T (NYSE:T) has gradually trended higher by 13.5% in the last six months. I believe that the rally is likely to gain momentum in 2024 considering the valuations and business growth metrics. To put things into perspective, T stock trades at an attractive forward price-earnings ratio of 7.1. Further, the stock offers a dividend yield of 6.41%.
From a business perspective, AT&T continues to invest in 5G and fiber for long-term growth. Business metrics have been positive with postpaid phone and fiber subscribers increasing on a sustained basis. AT&T is also looking to spin-off or sell its cybersecurity business. This will help in value unlocking and creating a leaner organization.
If we look at the financials, AT&T is a deleveraging story. The company has a BBB rating with the S&P with a stable outlook. For the first nine months of 2023, AT&T reported free cash flow of $10.4 billion. With business growth, I expect FCF to swell and this will support dividends and deleveraging.
Chevron Corporation (CVX)
With the possibility of multiple rates cuts this year, I believe that oil is likely to trend higher. This will be good news for oil and gas stocks. Chevron Corporation (NYSE:CVX) stock has declined by 15% in the last 12 months and looks deeply overvalued. I am bullish on a strong rally for this 4% dividend yield stocks.
In October, Chevron announced an agreement to acquire Hess Corporation (NYSE:HES) for a consideration of $53 billion. The acquisition is expected to be accretive to cash flow per share in 2025. Further, after the completion of the acquisition, Chevron expects annual capital expenditure of $19 to $22 billion. Big investments will translate into production growth and cash flow upside.
It’s worth noting that for Q3 2023, Chevron reported operating cash flow of $9.7 billion. With low break-even assets, OCF is likely to remain robust. This will ensure that aggressive investments are from internal cash flows and credit metrics remain strong.
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.
