The performance of the U.S. stock market has been excellent in 2024. Year to date, the S&P 500 Index and the Nasdaq-100 index are both up over 11%. The Dow Jones Industrial Average is higher by more than 5%. This is good news for equity investors with money in the market, but there is a downside; as stocks surge higher, undervalued blue chips become harder to find.
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What Is an Undervalued Stock?
When investors talk about a stock being undervalued, they mean a stock they believe is trading at a price lower than it is actually worth.
Stocks have a market value represented by their current price, but they are valued by analysts and investors in other ways. Fundamental metrics such as price-to-book, price-to-sales or price-to-earnings ratios can also indicate value. If the market price of a stock is lower than its perceived inherent value, investors feel like they’ve discovered a great deal or an incredible bargain.
Why Blue-Chip Stocks?
Blue-chip stocks are older, well-established and financially sound companies. They have a long history of profit and performance, which offers equity investors a sense of confidence and security.
Many blue-chip stocks pay regular dividends, providing investors with current income and enhancing total return. They also tend to be resilient investments that can weather the ups and downs of the markets.
Overall, blue chips are sought after by investors because they offer relative safety and excellent returns over the long run.
Undervalued Blue-Chip Stocks
Blue-chip stocks are very popular and trade in high volumes. They are extensively covered by Wall Street research analysts, and their finances are well known to all. It’s not easy to find bargains among blue-chip names, but undervalued blue chips do exist — and when you find them, you’ll want to buy them before others realize their inherent value. Here are five blue-chip stocks for you to consider:
— Verizon Communications Inc. (ticker: VZ)
— Realty Income Corp. (O)
— McDonald’s Corp. (MCD)
— American Water Works Co. Inc. (AWK)
— Johnson & Johnson (JNJ)
Verizon Communications Inc. (VZ)
VZ, in its current form, was created just 24 years ago, but it can still be considered a blue-chip stock. VZ was formed when the Regional Bell Operating Company, Bell Atlantic, merged with GTE in one of the largest corporate mergers up to that time.
That, of course, was at the dawn of the digital age. Back then, VZ was a regional phone company with national aspirations. Today, it is a $167.5 billion, high-tech powerhouse in mobile communications.
VZ provides wireless mobile and internet communications services and equipment to commercial and retail customers all over the world. The company also continues to provide landline phone service to its clients in the eastern U.S.
Considering the growth potential of the communications sector, VZ may be dramatically undervalued with a forward price-to-earnings ratio of 8.7.
VZ has a forward annual dividend of $2.66. Based on its share price, that equates to a yield of around 6.7%.
[READ: 9 Best Growth Stocks for the Next 10 Years]
Realty Income Corp. (O)
Rising interest rates and other difficult challenges in the commercial real estate sector have kept this blue-chip real estate investment trust, or REIT, from realizing its true value over the last few years.
O owns and operates more than 13,000 commercial buildings. All of them are in prime locations near growing population centers around the U.S. It leases its real estate on a long-term, triple-net basis to tenants with excellent credit. Some of the largest drugstore chains, most popular convenience stores and giant retailers rent space from O.
Realty Income is a $47 billion stock that’s a member of the exclusive Dividend Aristocrats. This means that it’s a component of the S&P 500 and has raised its dividend every year for at least 25 years. Currently, the stock is paying a forward dividend of $3.15, which gives it a yield of 5.9%.
When rates start to moderate later in the year, shareholders should realize good appreciation over time.
McDonald’s Corp. (MCD)
Stubborn price inflation has hit the American consumer hard, and that fact is reflected in the price of consumer cyclical stocks like MCD. Despite a broad stock market surge this year, MCD has underperformed. While this is not welcome news, it has made MCD an undervalued blue-chip stock with great potential going forward.
No fast-food restaurant is better known in the U.S. and around the world than MCD. And despite the stock’s recent struggles, it’s a dynamic and well-managed company. After reporting $25.4 billion in revenue in 2023, Wall Street is looking for a 4.7% increase to $26.6 billion in revenue for 2024.
President and CEO Chris Kempczinski is a capable and well-respected leader who has been busy actively modernizing the company’s restaurants. He’s skillfully managed inflation pressures and the challenges involved in correctly pricing menu items. Under Kempczinski’s leadership, the company has been dedicated to lowering costs by using mobile technology and kiosk ordering at most locations.
MCD is a $192 billion blue chip with a current dividend yield of 2.5%.
American Water Works Co. Inc. (AWK)
Publicly regulated utilities are not the first kind of firms that come to mind when investors think about blue-chip stocks, but this 138-year-old company definitely qualifies. In fact, AWK is the largest investor-owned water and wastewater utility in the U.S.
AWK provides all manner of water and wastewater services to customers in 24 U.S. states, including Georgia, Indiana, Iowa, Kentucky, Maryland, Tennessee, Virginia, West Virginia and Hawaii. According to Wall Street estimates, AWK should report $4.5 billion in revenue in 2024 and grow that figure by 6% to $4.8 billion in 2025.
AWK is dedicated to making large, long-term investments in its vast pipeline system. The costs of these improvements are staggering and, despite support from the federal government, extensive spending has hurt the stock price this year. In the long run, however, AWK looks undervalued.
Johnson & Johnson (JNJ)
The broad stock market, as measured by the S&P 500, is up 11.3% this year through May 22. JNJ, on the other hand, is down a little more than 3% in that period. This poor performance does not mean, however, that JNJ is a bad company or that investors should avoid the stock.
JNJ is an established, global leader in consumer and commercial health care products. The company has three principal business segments: consumer health, pharmaceuticals and medical tech.
The consumer health division concentrates on consumer hygiene as well as the health and beauty segment. The pharmaceutical section develops and distributes drugs that are extensively used to treat infections and chronic diseases. Finally, the medical technology segment produces and sells machines and devices that help medical professionals treat patients in hospital and emergency settings in a wide range of medical fields.
In its last earnings report released on April 16, JNJ reported $2.71 in earnings per share (EPS) for the first quarter of 2024. That EPS number beat Wall Street’s consensus of $2.64 by 5.5%. Revenue for the first quarter came in at $21.3 billion. Wall Street is looking for $22.2 billion in revenue for the current quarter. If JNJ is able to hit that number, it would represent a quarterly increase of 4.2%.
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5 of the Best Undervalued Blue-Chip Stocks to Buy Now originally appeared on usnews.com
