The 3 Most Undervalued Blue-Chip Stocks to Buy: November 2023
Some blue-chip stocks had it worse this year than others, particularly as bad news struck at the worst possible time. Markets hate unknowns and uncertainties, and a negative news cycle can crush a stock as investors and analysts weigh the potential long-term financial effects.
But, in many cases, that bearish sentiment is overblown. Downward pressure creates undervalued blue-chip stocks, which means massive opportunities for long-term investment strategies. Each of these three companies faced neutral-to-negative news this year, but (in my opinion) each of them has the operational strength and appropriate financial management techniques to rebound soon. Today, though, these blue-chip stocks to buy are overlooked and undervalued.
Conagra Brands (CAG)
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Conagra Brands (NYSE:CAG), the grocery stock known for its loved brands, including Slim Jim, Chef Boyardee and more, hit a slump this year. Shares are down 30% since January, with some of the loss coming on the heels of the company’s most recent earnings call — we’ll get to that in a minute. But, with the company sticking a 1.50 price-to-book ratio and an equally low price-to-earnings ratio, this blue-chip stock is decidedly undervalued.
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During the earnings call, much of the focus centered on two core topics: a sales slump and debt management. And, to be fair, the company’s revenue was completely flat year-over-year compared to October 2022. But what many overlook is the company reinvigorated its margins through cost-cutting initiatives and focused on core operational profit drivers. To that end, net income and EPS shot through the roof, with the latter jumping to $0.66, a 15.8% increase year-over-year.
Likewise, though the company carries more than its fair share of pricey debt, Conagra Chief Financial Officer Dave Marberger noted that “strong free cash flow enabled us to pay down approximately $130 million of net short-term debt while also funding $157 million for the Q1 dividend, highlighting our focus on balanced capital allocation.” CAG’s emphasis on debt management highlights its rapid adaptation to changing economic conditions as the company retired short-term debt over each of the previous three quarters.
This undervalued blue-chip stock is also shareholder-friendly, affirmed by the company’s CEO Sean Connolly’s notation that the company would continue prioritizing dividend distributions. The company’s current yield is 5%. And, with a 62% payout ratio, its dividend is sustainable for the foreseeable future.
3M (MMM)
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The 300 lb. gorilla sitting on 3M (NYSE:MMM) is the series of lawsuits and litigation pending against the company. Markets hate uncertainty, and unknown court outcomes could cut deeply into 3M’s bottom line. Reacting to that uncertainty, the company’s stock fell almost 25% since January. But, practically speaking, 3M is here to stay considering its product diversity (healthcare, materials and more) is defensive. And, trading at 10x price-to-earnings, 3M is a materially undervalued blue-chip stock.
3M’s longevity is all but guaranteed based on the company’s closely guarded patents and intellectual property. As Morningstar analyst Joshua Aguilar noted, “The firm’s proprietary secrets are closely held as 3M rarely grants licenses, and its technology is difficult to imitate. As a result, 3M typically charges a 10% to 30% price premium relative to the market.” That guarded approach means that 3M’s high-end, trusted lines in worker safety and healthcare are all but untouchable.
The company reported a year-over-year GAAP earnings cut, largely due to the financial impact of the settled combat arms earplug lawsuit. Nevertheless, 3M pivoted successfully and improved its adjusted operating income margin by nearly 2%. The most recent quarter marked a healthy 23.2% adjusted income margin. This serves as a kind of proof-of-concept for 3M’s adaptation to future litigation. The company can keep the ship afloat financially even when hit with a massive one-time payout event.
And, despite shuttling cash to litigants, the company maintained its dividend distribution with a maintainable 0.61 payout ratio. The stock yields more than 7.5% today, making it an undervalued blue-chip stock offering substantial income opportunity.
Verizon (VZ)
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Verizon (NYSE:VZ) made the news over the summer after concerns over lead shielding within the entire telecom industry broke. This created another “known unknown” paradox as markets tried to price in the long-term financial impact of possible litigation. But, though it’s still early, the initial shock seems to have been overblown. Verizon stock hasn’t yet recovered, though, making it a critically undervalued blue-chip stock.
Competition within the telecom sector is fierce and the sector’s total addressable market is largely accounted for. That means VZ likely won’t offer massive growth opportunities in the future. It also means the stock will offer a low-volatility staple for a well-rounded portfolio. It currently trades at 1.5 price-to-book. And once shares stabilize, the company’s emphasis on converting prepaid phones to postpaid contracts will further increase its free cash flow. Still, the company recently reported a $2.2 billion free cash flow increase year-over-year. That shows Verizon has the financial chops to realign its interests amid economic uncertainty.
What Verizon doesn’t offer in growth it more than makes up for in income opportunities. The current 7.32% yield continues its long-term commitment to returning shareholder value.
On the date of publication, Jeremy Flint held no positions (directly or indirectly) in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.
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