Faisal Humayun
·4 min read
Blue-Chip stocks are like the fortress for the portfolio. These stocks defend the portfolio from volatility besides providing regular cash flows through dividends. At the same time, blue-chip stocks can deliver healthy capital gains. As a small example, Costco Wholesale (NASDAQ:COST) has trended higher by 226% (capital gains) in the last five years. This has led to this list of blue-chip stocks under $20.
Therefore, in any market condition, I would look at 40% to 50% exposure to quality blue-chip names. It’s a bonus if investors can spot low-price blue-chip stocks. This column focuses on three undervalued blue-chip stocks under $20 that can deliver multibagger returns in the long term.
Temporary industry or company specific headwinds have depressed these blue-chip names. As a result, these stocks trade at a valuation gap. Once sentiments reverse, the rally can be robust for these stocks that represent companies with strong fundamentals and healthy free cash flow outlook.
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Let’s discuss the specific catalysts to be bullish on these blue-chip stocks under $20.
Panasonic Holdings (PCRFY)
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Panasonic Holdings (OTCMKTS:PCRFY) is an undervalued blue-chip stock under $20 that can deliver 3x to 5x returns by 2030. PCRFY stock trades at a forward price-earnings ratio of 7.2 and offers a dividend yield of 2.42%.
One reason for Panasonic remaining depressed is weak sentiment for the EV industry. However, beyond near-term macroeconomic headwinds, the outlook remains bullish. Further, Panasonic has some ambitious expansion plans for the EV battery business that’s likely to translate into healthy revenue growth.
To put things into perspective, Panasonic plans to quadruple EV battery capacity to 200GWh by 2031. At the same time, the Company is investing heavily in innovation, which provides an edge amidst competition.
Panasonic is currently working towards increasing the volumetric energy density of the lithium-ion batteries by 5% in 2025. The long-term target is to increase density by 25% by 2030. This can have a significant impact on the driving range and help in increasing the attractiveness of EVs.
Vale (VALE)
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If we look at CAGR of returns for various asset classes, industrial commodities are the most undervalued. I will not be surprised if commodities deliver healthy returns in the next decade. Vale (NYSE:VALE) is among the blue-chip commodity stocks trading at a deep valuation gap. VALE stock trades at a forward price-earnings ratio of 4.6 and offers a dividend yield of 9.2%. I would bet on at least 3-bagger returns from the stock in the next five years.
One reason to like Vale is strong fundamentals. For Q4 2023, the Company reported operating cash flow of $2.5 billion. This implies an annual OCF potential of $10 billion. With strong cash flows, Vale is positioned to make significant capital investments and sustain dividends.
It’s worth noting that the iron ore business is the cash flow driver. However, for Q4 2023, the Company’s copper production increased by 50% on a year-on-year basis. While Nickel production declined by 5%, it was due to the transition to underground mining at Voisey’s Bay as well as the planned furnace rebuild at Onça Puma. In the coming years, global energy transition metals like copper and nickel will contribute to cash flow upside.
AT&T (T)
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Even with good news on the business front, AT&T (NYSE:T) stock has remained sideways in the last 12 months. A strong rally seems likely with the stock trading at an attractive forward price-earnings ratio of 7.7. T stock also offers a robust dividend yield of 6.51% and I believe that dividends are sustainable.
For 2023, AT&T reported free cash flow of $16.8 billion. The Company has guided for FCF of $17 to $18 billion this year. This is important as AT&T is focused on deleveraging. Healthy cash flows will ensure that AT&T continues to meet its deleveraging target and credit metrics improve.
At the same time, the Company has reported sustained growth in 5G and fiber subscribers coupled with average revenue per user growth. Between 2018 and 2022, AT&T has invested more than $140 billion towards building the U.S. wireless and wireline network. The benefits of these investments will continue to boost cash flows in the coming years.
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.comPublishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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