In this article, we discuss the 10 undervalued blue-chip stocks to buy now. If you want to skip our analysis of these stocks, go directly to the 5 Undervalued Blue Chip Stocks to Buy Now.
Blue-chip companies are considered to be established and large-scale organizations with a rich history of long-term stable financial performance. These stocks have the power to hold their value during economic uncertainty and give strong returns during a healthy economic period.
The uncertainty this year has investors on the lookout for blue-chip stocks due to the turbulent economic environment. The Russia-Ukraine conflict resulted in energy and commodity prices rocketing. This triggered inflation, which is causing the US Federal Reserve to tighten its monetary policy by raising interest rates. The increase in interest rates does not work well for high-growth stocks as they use leverage to boost their growth and the cost of growth becomes expensive. As a result, the valuation of growth stocks comes under pressure and starts experiencing contraction. This was evident during the recent sell-off in the tech sector.
Companies with a strong history of increasing earnings and dividends and the ability to weather the downturn tend to deliver the most consistent long-term returns. The rationale for purchasing blue-chip companies is stronger than ever, with interest rates surging and global tensions at all-time highs. As the business operations of most blue-chip stocks are stable, they give back to shareholders through dividends and share repurchase programs. Placing funds in blue-chip stocks gives you a margin of safety during recessionary periods.
Many hedge funds are heavily invested in popular blue-chip stocks like Meta Platforms, Inc. (NASDAQ:FB), Philip Morris International Inc. (NYSE:PM), and Pfizer Inc. (NYSE:PFE). Thirteen of the Dow’s 30 equities are among the most popular hedge fund stock picks. This is due in part to the Dow stocks’ high market capitalizations and associated liquidity, which allows institutional investors to acquire or sell big holdings with ease. For experienced money managers, renowned blue-chip stocks also carry a reduced level of reputational risk.
Our Methodology
In this article, we take a look at 10 undervalued blue-chip stocks to buy now. We have analyzed the forward P/E ratio to assess the valuation of stocks and see if companies are currently trading at a discount. Furthermore, the business fundamentals and growth prospects have been observed to consider the future performance of these stocks. Hedge fund sentiment, based on the 912 funds in Insider Monkey’s database as of Q1 2022, has also been included to provide readers with a better context for investment decisions.
10 Undervalued Blue Chip Stocks to Buy Now
10. Alcoa Corporation (NYSE:AA)
Share Price as of June 6: $63.01
Number of Hedge Fund Holders: 50
Alcoa Corporation (NYSE:AA) is a Pittsburgh, Pennsylvania-based bauxite, alumina, and aluminum producer with operations spread across 10 countries around the world.
The average price of aluminum has doubled from $1,915 per metric ton in 2020 to $3,861 as of Q1 2022. The demand for aluminum looks strong as electric vehicles use them to reduce their weight and thus increase their range. During Q1 2022, Alcoa Corporation (NYSE:AA) reported quarterly EPS of $2.49, which translates into an annualized EPS of $10. This reflects that the stock is trading at a forward adjusted P/E multiple of 6.1x. As per the calculations of Simply Wall St, Alcoa Corporation (NYSE:AA) is trading at a discount of around 44%, making the company quite undervalued.
In the last 6 months, Alcoa Corporation’s (NYSE:AA) stock price has risen over 30%. The number of hedge funds invested in Alcoa Corporation (NYSE:AA) increased by nine on a sequential basis. Soroban Capital Partners was the leading hedge fund investor in the company during Q1 2022.
9. Micron Technology, Inc. (NASDAQ:MU)
Share Price as of June 6: $69.94
Number of Hedge Fund Holders: 78
Micron Technology, Inc. (NASDAQ:MU) is a Boise, Idaho-based memory and storage products company. The company produces products like dynamic random-access memory (DRAM), flash memory, and USB flash devices.
In a report filed on May 14, Eric J. Savitz at Barron’s termed Micron Technology, Inc. (NASDAQ:MU) as the most undervalued stock in the equity market with a one-year forward adjusted P/E multiple of five times. Analysts are thinking along similar lines as C.J Muse at Evercore ISI termed Micron Technology, Inc. (NASDAQ:MU) stock a steal in the high 60s for investors that are looking for a long-term investment opportunity.
In a note issued to investors on May 13 following the analyst day meeting, Muse maintained an Outperform rating on Micron Technology, Inc. (NASDAQ:MU) stock with a price target of $90. According to him, the biggest takeaway was that the memory market is outperforming the semiconductor marketing in terms of growth and the companies in the industry are acting in a disciplined manner.
Here’s what Hazelton Capital Partners said about Micron Technology, Inc. (NASDAQ:MU) in its Q3 2021 investor letter:
“It’s hard to explain how shares of Micron Technology, manufacture of DRAM and NAND semiconductor chips, can fall during a global chip shortage. In most industries, focusing on demand can give you a clear insight into what lays ahead for a company. Today, the memory and storage chip industry is no different. However, in the past, companies focused on market share led to the reckless build out of chip fabrication plants (FABs), oversupply, falling average selling prices (ASPs) of memory and storage chips, lower margins, and declining cash flows. As the industry consolidated – there are now just 3 major producers of DRAM and 5 on the NAND side – rational behavior among the key players began to take hold as competitors began focusing more on R&D. Currently, chip pricing remains cyclical although less so than in the past and that cyclicality has a long-term upward bias. The ongoing transition to newer and more robust platforms (3D 176-layer NAND & 1-Alpha node DRAM) has provided the memory and storage chip industry with improved supply capacity under its current manufacturing footprint, ultimately pressuring ASPs. Over the past three years, as most of the large platform conversions have already taken place, being able to add more bits per wafer has reached a saturation point. With no major FAB build outs planned in the near-term by competitors Samsung or SK Hynix, constrained supply and flattening cost curves should lead to durable and upward sloping ASPs once the recent volatility from the chip shortage subsides.
Currently Micron Technology trades at just 8x 2022 estimate earnings. MU is expecting growth in both DRAM and NAND not just from the supply of more chips to data centers, artificial intelligence, the auto sector, and mobile devices, but also from greater demand for gigabyte capacity per unit within those segments. With a healthy balance sheet, improving return on invested capital, and expanding cash flows, not only should Micron benefit from improving future earnings but its multiple should also reflect the transition to a flattening cost curve.”
As of Q1 2022, Micron Technology, Inc. (NASDAQ:MU) was held by 78 hedge funds.
8. American International Group, Inc. (NYSE:AIG)
Share Price as of June 6: $58.04
Number of Hedge Fund Holders: 34
American International Group, Inc. (NYSE:AIG) is a leading diversified insurance company with operations spread across 80 countries and a headcount of 49,600 employees. The stock is trading at a forward adjusted P/E multiple of 11.02x, which represents a discount of 7.4% when compared against the average five-year forward adjusted P/E multiple of 11.90x.
American International Group, Inc. (NYSE:AIG) is working on spinning off its Life and Retirement business into a new entity called Corebridge. This will allow the company to focus on its casualty and property business. Furthermore, American International Group, Inc. (NYSE:AIG) has reached an agreement with BlackRock to manage up to $150 billion worth of its assets. AIG is one of the few companies that are benefitted from an interest rate hike as this increases the discount rate applied to future liabilities. Furthermore, rising interest rates also make annuities more attractive to potential customers. Although American International Group, Inc. (NYSE:AIG) has not increased its dividend for the past five years, it is still offering a forward dividend yield of 2.20% as of June 6.
American International Group, Inc. (NYSE:AIG) was held by 34 hedge funds as of Q1 2022.
7. Nutrien Ltd. (NYSE:NTR)
Share Price as of June 6: $93.34
Number of Hedge Fund Holders: 60
Nutrien Ltd. (NYSE:NTR) is a Saskatoon, Saskatchewan-based fertilizer company that has gained more prominence following the start of the conflict between Russia and Ukraine in late February 2022. Nutrien Ltd. (NYSE:NTR) is the biggest manufacturer of potash and the third biggest manufacturer of nitrogen fertilizer globally.
Russia is the world’s leading exporter of fertilizers. The conflict has caused Russia to ban exports of fertilizer to fulfill the demand for local agriculture production. Fertilizers’ price has more than doubled since September 2020. Furthermore, natural gas prices are continuing to rise, which is a key raw material in the manufacturing of fertilizers. Nutrien Ltd. (NYSE:NTR) anticipates FY22 EPS to be in the range of $16.20 to $18.70. At a midpoint of $17.45, Nutrien Ltd. (NYSE:NTR) stock is trading at an FY22 adjusted P/E ratio of 5.35x only.
In its Q1 2021 investor letter, Miller/Howard Investments discussed its stance on Nutrien Ltd. (NYSE:NTR). Here’s what the investment management firm said:
“For the most part, performance of the stocks within the Income-Equity Strategies was skewed towards the high-performing market sectors with two exceptions – our consumer discretionary and technology stocks both did better than their broad market peers… We bought Nutrien (NTR), a producer of fertilizer, which we believe should benefit from increasing crop prices.”
At the end of Q1 2022, Nutrien Ltd. (NYSE:NTR) was held by 60 hedge funds.
6. Microsoft Corporation (NASDAQ:MSFT)
Share Price as of June 6: $273.02
Number of Hedge Fund Holders: 259
Microsoft Corporation (NASDAQ:MSFT) is a Redmond, Washington-based tech giant that manufactures and sells consumer goods, personal computers, and software. Although Microsoft Corporation’s (NASDAQ:MSFT) stock is trading at a forward adjusted P/E multiple of 28.7x, which seems to be high as compared to other members on this list, the stock can still be considered undervalued given the business fundamentals.
The revenue of Microsoft Corporation’s (NASDAQ:MSFT) cloud business grew by 29% YoY to $19.1 billion during Q3 FY2022. The cloud segment contributed 39% to the total revenue and had a gross profit margin of around 70%. Azure is the cloud computing platform of Microsoft Corporation (NASDAQ:MSFT) that allows users to construct, operate and manage various applications across different clouds. Just a month before the completion of the fourth quarter of FY2022, Microsoft Corporation (NASDAQ:MSFT) revised its revenue and EPS estimates due to an unfavorable exchange rate impact. The EPS guidance was revised to $2.24 to $2.35 as opposed to the prior guidance of $2.28 to $2.35.
Microsoft Corporation (NASDAQ:MSFT) was discussed in the Q4 2021 investor letter of Motiwala Capital. Here’s what the firm said:
“Microsoft (NASDAQ:MSFT) re-enters our portfolio after a long gap. MSFT sells enterprise and consumer software products as well as hardware products such as the Xbox video game console and Surface laptops. All business segments experienced double-digit revenue growth and earnings per share have compounded in the mid-double digits over the last 5 years. We believe MSFT continues this momentum in the years ahead.”
As of Q1 2022, 259 funds held a stake in Microsoft Corporation (NASDAQ:MSFT).
Besides Microsoft Corporation (NASDAQ:MSFT), stocks such as Meta Platforms, Inc. (NASDAQ:FB), Philip Morris International Inc. (NYSE:PM), and Pfizer Inc. (NYSE:PFE) are also among the 10 undervalued blue-chip stocks to buy now.
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Disclose. None. 10 Undervalued Blue Chip Stocks to Buy Now is originally published on Insider Monkey.
