With the grandfatherly United States bull stock market sprinting on renewed legs lately, the long and steep ride up since the big bottom in March of 2009 has many market observers fearful that some stocks have gotten too pricey. Valuations in some sectors for stock prices seem downright frothy, even for many high-quality blue-chip companies.
Blue chip stocks, of course, line the lists of the Dow Jones Industrial Average and S&P 500. We are talking companies like Coca Cola, and often companies with high dividend yields. With interest rates so low, many investors look to solid dividend payments as a way to boost retirement income and contribute to an attractive total return.
Typically, blue chip status is conferred on stocks with a large market capitalization, meaning the total of all stock trading in the market adds up to a lot – typically ten billion or more, sometimes a lot more. So the “large cap” just means a high market cap. These are often considered safer and more conservative stocks to buy.
Blue chip stocks typically have good long term track records, and are often counted among respected analysts’’ stock picks. Often, they sport impressive long-term track records, but not always.
There’s an old expression among real estate investors, that “you make your profit when you buy it.” This means you must be careful not to overpay if you want to make a decent return on rents and when you eventually sell the property. The same sort of logic applies to stocks. Let’s look at an example using a rental house with simplified math.
Say if you buy the rental for $100,000, and clear $1,000 a month after expenses and vacancy. That’s $12,000 on $100,000 or 12% a year, pretty good. But if you paid $1,000,000, the return drops to $12,000/$1,000,000 or 1.2%, which is pretty poor. Plus, the odds of selling for a higher price are much better if you got a good deal and only paid $100,000, than if you overpaid and sunk $1,000,000 into it.
Camarda believes – like Warren Buffett – that stocks should be scrutinized the same way. It’s not just about the high quality or sexiness of the real estate or the stock.
It’s really about looking at the stock as a piece of a business on which you expect to make a decent return. Too many people view stocks like lottery tickets, and don’t spend enough time thinking about the accounting numbers to see if the price you will pay for a piece of the business is justified by the underlying value of the business operations and assets, and by the expected earning capacity of the business.
So from the this perspective, you many want to consider only blue chip stocks that are selling for what seem like reasonable prices in order to have a good shot at making money over the long term.
Things like the price to earnings ratio – the price of the stock now divided by the earnings per share, and the dividend yield – the expected payout to shareholders divided by the stock price – are pretty fundamental metrics.
With this valuation discipline in mind, here are twenty-five blue chips stocks that look like reasonable investments, ranked in no particular order.
We stress that in an effort to be compliant with Federal securities regulations, the stocks below are not current holdings or recommendations in the portfolios we manage for clients.
Biogen – BIIB – is a global pharmaceutical company which seem very undervalued, with the stock recently trading for less than eight times earnings estimates. It has a large liquid warchest that should allow it to continue growth by acquisition or internal investment.
Whirlpool – WHR – is a large appliance maker with worldwide operations. The stock recently is cheap at only about nine times expected earnings, and WHR sports an attractive 3.5% dividend yield.
Citigroup – C – seems quite cheap at only about 8 times earnings, and at less than book value. The nearly 3% dividend yield is attractive.
Canadian Imperial Bank of Commerce – CM – also seems cheap at less than 9 times expected earnings, and pays a 5% dividend yield.
FedEx – FDX – has a strong balance sheet, about a 1.4% yield, and recently showed a P/E of about 11 based on expected earnings.
Kroger Co. – KR – recently traded at a reasonable P/E of around 11 based on forecast earnings, and paying over 2% in dividends.
Prudential – PRU – recently could be had at less than 8x expected earnings, with an attractive 3.8% dividend yield.
Celanese – CE – a specialized chemical maker churns out a very rich free cash flow, and recently could be had for a little over nine times earnings, with a 2.3% yield.
Exxon Mobil – XOM – shows a somewhat rich PE for the industry at about 18 based on current earnings but pays around 3.5% based on forecast results.
Archer-Daniels Midland – ADM – recently pushed 3.2% in yield, and traded for under a P/E of 12 based on the expected next year’s results.
Goldman Sachs – GS – the erstwhile white shoe investment bank seemed recently cheap with acurrent forward P/E of 8.2 and yield pushing 1.65% Readers may remember Warren Buffett as arguably Goldman’s most famous shareholder.
Bank of New York Mellon Corp (BNY) – BK- is in turnaround mode, but is well-capitalized and has a sharp-pencil management team. The bank recently traded for around 11 times earnings and yielded around 2.4%.
Capital One – COF – recently traded for a P/E of about 7 and paid 2%.
Pfizer – PFE – this pharma bemouth sports a strong balance sheet and says it is focused on dividend growth and share repurchases. It recently yielded over 3% and traded for less than 15x earnings.
Amgen – AMGN – recently showed a P/E of 14 and a yield of 3%.
Medtronic – MDT – recently showed a lofty P/E of over 17x adjusted projections and a yield of about 2 1/4 %.
Caterpillar – CAT – P/E of under 13, 2.5% yield.
Delta Air Lines – DAL – P/E around 8.5 forecast earnings, about 2.4% payout.
Target – TGT – around 11 times forecast earnings, and a nice yield over 3%.
Merck & Co – MRK – another big pharma, Merck recently showed a P/E of 25 (not necessarily high for a pharma but you should dig deeper), and a yield pushing 3%.
JPMorgan Chase & CO – JPM – recently traded for a P/E around 11, paying 2.9%
Allstate Corp – ALL – the insurer had a P/E of about 10 and yield 2.2% recently.
Lam Research – LRCX – was recently trading around 13x earnings with a 2%+ yield.
Alphabet – GOOG – the tech giant recently plunged to a P/E of “only” 29.6 (pretty cheap for a big tech), but pays no dividends. Looks like it could be a real good buy for those who like tech.
Tyson Foods – TSN – shows a P/E of 14 and a yield of 2%. Higher projected earnings drop the P/E to 10.
Johnson & Johnson – JNJ shows a current-earnings P/E of 26, and yields about 2.6%
Walmart – WMT – Sam’s empire offers a yield of about 2%, but seems pricey with a P/E of 45 on trailing earnings. Dig deeper and you may find some gold.
Lowe’s Companies – LOW – yielding only 1.7%, and with a current earnings P/E of nearly 40.
Deere & Co – DE – seems reasonably priced with a current earnings P/E of 16; the yield is 1.6%
Intel – INTC – shows a P/E under 12, and a yield of about 2.5%.
Oracle – ORCL – with a P/E of just under 20, it yields close to 2%.
Qualcomm – QCOM – the P/E is up there, but this is a tech company where P/Es are higher, and the 3% yield is very juicy for tech.
Cisco Systems – CSCO – looks attractive with a forward 15 P/E and 2.9% yield.
Microsoft – MSFT – boasts strong cash flow, a cheap 26 for tech P/E, and a 1.4% payout.
Please note that the foregoing are investment ideas which may warrant further research on the part of readers, and are specifically not securities recommendations. Moreover, the investment ideas are not intended to be tailored to any specific investment objective. Please see additional important detailed disclosure here: https://www.camarda.com/adv-important-disclosure/