Investing in blue-chip stocks is a cornerstone of any well-diversified portfolio. While the risk tolerance of investors may vary, there is a consistent strategy that has proven to be successful within blue-chip portfolios. A combination of exposure to evergreen blue-chip stocks, held for an investment horizon of five to ten years, along with exposure to blue-chip stocks for a shorter-term period of less than five years, can optimize returns. Even the most reliable blue-chip companies can experience temporary setbacks in stock performance due to industry or company headwinds. However, when these headwinds subside, blue-chip stocks have the potential to surge from undervalued levels, often outperforming index returns significantly.
In this article, we will delve into three blue-chip stocks that have experienced subdued performance over the past 12 to 24 months but possess strong fundamentals and are poised for a bullish reversal in the next 36 months.
Lockheed Martin (LMT)
Global military expenditure has witnessed a notable increase in recent times, driven by heightened geopolitical tensions. This trend is expected to continue, making defense stocks an attractive investment option. Among blue-chip defense stocks, Lockheed Martin (NYSE: LMT) stands out as undervalued, currently trading at a forward price-earnings ratio of 17.8. Despite positive business developments and industry tailwinds, LMT stock has remained relatively stagnant over the past 12 months. This presents an opportune accumulation point for investors anticipating a breakout rally. Lockheed Martin boasts a record order backlog of $160.6 billion, providing clear revenue and cash flow visibility. The company has projected a free cash flow of $6.2 billion for the current year, ensuring stable dividends and the flexibility to invest in research and development. Lockheed Martin’s position at the forefront of innovation and next-generation defense technology solutions will likely continue to drive growth and expand its order backlog.
AT&T (T)
AT&T (NYSE: T) is another undervalued blue-chip stock that warrants attention. Trading at a forward price-earnings ratio of 7.5 and offering an attractive dividend yield of 6.72%, T stock has recently shown signs of recovery, gaining 8% over the past six months. While this may not seem like a substantial return, it indicates that the stock has likely reached a bottom. AT&T’s financial metrics have shown steady improvement. In 2023, the company reported a free cash flow of $16.8 billion, while its net-debt-to-adjusted EBITDA declined to 2.97x by the end of the year. With positive business metrics expected to continue, AT&T is well-positioned for deleveraging. The company has consistently added 5G wireless and fiber subscribers while simultaneously increasing its average revenue per customer. These factors are likely to support EBITDA margin expansion. AT&T has projected a free cash flow of $17 to $18 billion for the current year, indicating a positive outlook. Investors can expect T stock to rebound from its deeply oversold levels in the near future.
Pfizer (PFE)
Pfizer (NYSE: PFE) has faced significant bearish sentiment, leading to a prolonged correction. However, market sentiment can often be contrarian, and negative commentary can present buying opportunities. PFE stock appears to be trading at a valuation gap, and a strong reversal rally from its current level of $26 is anticipated. The stock offers a substantial dividend yield of 6.46%, and dividends are well-supported. Pfizer received a record number of nine new molecular entity approvals from the U.S. Food and Drug Administration in 2023, which will positively impact its growth trajectory in the coming years. The company’s long-term growth prospects are bolstered by a pipeline of 112 new molecular entities, with Pfizer targeting $20 billion in incremental revenue from these entities by 2030. Acquisition-driven growth is another focus for Pfizer, as evidenced by the completion of its acquisition of Seagen in December 2023. This acquisition provides Pfizer with a significant presence in the oncology segment, and the company aims to generate $25 billion in revenue from new business deals by the end of the decade. Despite the decline in COVID-19 vaccine revenue and the potential for certain drugs to go off-patent, the recent sell-off of PFE stock is considered overdone.
