Blue-chip stocks are those with top-notch reputations. They’re the companies known for being high quality, faring well during recessions and having the brands, managerial excellence and resiliency to prosper through all economic conditions.
While there is no one definitive list, people have generally looked to the Dow Jones Industrial Average as a representation of blue-chip stocks. That benchmark tends to include older, more established companies, while the S&P 500 and Nasdaq can include smaller, newer and more growth-focused companies.
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The DJIA outperformed the other major American equity indexes in 2022. It may do so again going forward, especially if economic conditions take a turn for the worse. These 10 blue-chip stocks are all Dow components and should serve as solid defensive holdings with significant upside potential once market sentiment recovers.
Here are 10 of the best blue-chip stocks to buy now:
— Walmart Inc. (ticker: WMT)
— Chevron Corp. (CVX)
— Procter & Gamble Co. (PG)
— Johnson & Johnson (JNJ)
— Coca-Cola Co. (KO)
— McDonald’s Corp. (MCD)
— Goldman Sachs Group Inc. (GS)
— Microsoft Corp. (MSFT)
— Travelers Cos. Inc. (TRV)
— Visa Inc. (V)
Walmart Inc. (WMT)
Walmart remains the country’s dominant brick-and-mortar retailer. The company’s e-commerce business is also a growing portion of its revenue. On top of that, Walmart has an extensive international arm, with operations in two dozen countries and more than 10,000 stores.
For many years, investors felt that Amazon.com Inc. (AMZN) had left Walmart in the dust, but Amazon has stumbled in recent years, and its profitability metrics have sagged. Amazon’s acquisition of Whole Foods failed to dent Walmart’s hold in the vital grocery market.
It seems omni-channel retail will be an increasingly valuable offering, and Walmart’s brick-and-mortar operations remain far ahead of Amazon. With the economy potentially heading into a fairly steep recession over the next year, Walmart may also benefit as shoppers “trade down” from more expensive stores. With the recent drop, shares are now selling for a reasonable 25 times forward earnings.
Chevron Corp. (CVX)
The oil and gas industry enjoyed a strong recovery over the past two years as inflation and geopolitical risks highlighted the value of oil and gas assets. Currently, oil is in a slide driven by fears around the global economy and potential contagion in the banking sector.
However, it seems likely that if economic conditions worsen, the world’s central banks would have to inject liquidity into the economy. That would likely lead to higher inflation and commodity prices once again. All this is to say that the current oil and gas bull market is likely to persist despite near-term volatility. Plus, Chevron is well positioned for the future with its substantial investments in liquefied natural gas, or LNG, which have proven invaluable in providing electricity to Europe as normal gas sources from Russia have become challenged.
Chevron is a true blue-chip stock and offers fair value at less than 11 times forward earnings and a 3.9% dividend yield.
Procter & Gamble Co. (PG)
Procter & Gamble is one of the world’s largest consumer products companies. The company’s roots go back almost two centuries. Modern-day P&G has focused on branded consumer goods for categories such as baby, feminine, family care, grooming, beauty and laundry. These are the classic staples consumers need to buy on a regular basis regardless of economic conditions.
There is some risk from generic products or cheaper alternatives, but P&G’s size and large marketing budget give it significant and persistent advantages against rivals. Through May 23, PG stock is only up about 20% since early 2020. That’s an unusually low figure for P&G historically and represents an opportunity today. Earnings are currently pressured by inflationary factors including high input costs for items such as chemicals. Once these pressures work themselves out, however, earnings should jump, leading P&G shares to new highs. In the meantime, there’s a rock-solid 2.5% dividend yield.
Johnson & Johnson (JNJ)
Johnson & Johnson, like P&G, is another mainstay in many conservative investors’ portfolios. The health care giant has increased its dividend for an incredible 60 years in a row, offering investors a growing income stream for nearly a whole lifetime. J&J has long prided itself on internal diversification, with the company selling hundreds of products across three categories: consumer health, medical devices and pharmaceuticals. This is about to change.
That’s because J&J is set to spin off its consumer health business as a new company called Kenvue. Between that and lingering lawsuits related to J&J’s talc products, shares have fallen since the beginning of the year. Investors can take advantage of that drop to get one of America’s most stable blue-chip stocks on sale, while also positioning themselves to get in on the new Kenvue spinoff at the ground floor.
Coca-Cola Co. (KO)
Sometimes the best offense is a good defense. Soft drink giant Coca-Cola is hardly the most dynamic growth company out there. But in troubled times such as these, Coca-Cola’s steady sales and consistent profitability are a welcome relief for investors.
Famed investor Warren Buffett has held shares of Coca-Cola for decades, throughout its ups and downs, and has been amply rewarded for it. Coca-Cola increases its dividend every year and shares currently yield a solid 2.9%. Shares are going for a reasonable 25 times forward earnings for investors who buy into this storied blue-chip stock today. And the company may see a benefit in coming quarters as well, as inflation starts to recede and the costs of labor and packaging materials level off.
McDonald’s Corp. (MCD)
Like Coca-Cola, McDonald’s is a tremendous brand that sells a recession-resistant product. Hamburgers and Coke both tend to be popular regardless of broader economic conditions. McDonald’s global brand is also a great asset for stabilizing results.
The company has operations in dozens of countries, meaning that it gets benefits from revenues in dozens of different currencies, while having natural smoothing of results among the various regions where it operates. McDonald’s also owns a ton of the real estate lying under its restaurants. This has proven valuable recently as inflation has taken hold. McDonald’s real estate assets gain in value while competitors have to pay higher rents on their leased buildings. McDonald’s shares aren’t particularly cheap today, but earnings should improve once commodity prices such as beef start to normalize.
Goldman Sachs Group Inc. (GS)
Financial stocks are under fire given the recent run on several prominent American banks. However, it’s important to remember that not all banks are created equal. In fact, while many are vulnerable to sudden volatility in interest rates or loss of deposits, other banks can profit from instability.
Goldman Sachs is the classic example of the latter group. Due to its shrewd capital allocation, Goldman was able to keep earning profits during the 2008 financial crisis even as most other banks lost big with wrong-way bets on the housing and mortgage markets. Presumably, Goldman should be able to attract deposits and find attractive investment opportunities in the current market chaos.
Despite these strengths, Goldman has sold off with the broader sector, creating a buying opportunity now.
Microsoft Corp. (MSFT)
A counterintuitive effect of the banking crisis is that it could provide support for technology companies such as Microsoft. That’s because much of the valuation declines in growth stocks were due to the sharp and persistent rise in interest rates.
Now, though, yields on key bonds such as long-duration U.S. Treasurys have fallen. The cost of money is dropping. This, in turn, should make investments in start-ups and smaller technology companies more attractive again. That should flow through the whole tech industry, resulting in more sales for the giants like Microsoft. Between Windows, Office and its cloud business, Microsoft is an indispensable part of the technology ecosystem.
As interest rates eventually start to decline, the layoffs and cutbacks in the tech industry could let up, and perhaps a new round of growth will begin. That would be great news for Microsoft. On top of that, Microsoft is a leader in artificial intelligence, which appears to be setting up for a boom of its own.
Travelers Cos. Inc. (TRV)
Another way to take advantage of the current banking crisis is to own financial companies that aren’t banks. There has been a general sell-off in anything related to lending and fixed income as investors rush to the exits. However, insurance companies like Travelers are in a far better position. That’s because of how they’re funded.
With a bank, depositors can pull their funds at any time, leading to a crisis. With insurance, however, policyholders pay in premiums over time and then the insurance company invests those funds for many years before paying out on the policies. This capital is long-term in nature, making an insurer like Travelers immune to short-term crises of confidence.
Meanwhile, higher interest rates are still ultimately a good thing for financial companies, despite the recent volatility. An insurance company has a much easier time making money with risk-free bond rates at 5.5% rather than 1%, after all. TRV stock is now discounted; shares have dropped from $194 in January to a May 22 close of $181.10 amid the current uncertainty.
Visa Inc. (V)
Visa is another example of a financial company that can prosper despite the current banking mess. Visa and rival Mastercard Inc. (MA) process most credit card transactions globally. This makes for attractive industry dynamics. The power of a global network linking countless banks, merchants and individuals creates a massive benefit that distances the company from competitors.
Visa also enjoys large economies of scale, allowing it to offer individual transactions with low fees that fintech startups have struggled to match. Investors might think the credit card growth story is played out. However, growth continues to be robust, especially in emerging markets.
The pandemic highlighted the value of e-commerce, touch-free payments and other such solutions to replace cash. Visa shares may also benefit as investors rotate within the financial sector, selling banks and buying replacement holdings that come with less interest rate and balance sheet risk.
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10 Best Blue-Chip Stocks to Buy for 2023 originally appeared on usnews.com
Update 05/23/23: This story was previously published at an earlier date and has been updated with new information.
