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3 blue chip stocks with low PE ratios offering both quality and value

For young investors, blue chip stocks can look relatively lackluster. The stock tends to be in the growth and penny stocks space. However, it would be a big mistake to ignore the added value blue-chip stocks provide when building a long-term portfolio.

If a growth stock’s trading story clicks, multi-bagger returns are in the offer. However, it is not uncommon to see emerging stories fail, leading to a massive stock drop in a short period of time. We’ve seen this happen time and time again over the past few years, highlighting the stability and regularity blue-chip stocks create for a portfolio.

Personally, I would allocate 50% of my portfolio to blue chip stocks. This is partly due to the multiple headwinds that have proliferated in equity markets since the start of 2022. These headwinds have created a situation where some high-quality stocks are now trading at very attractive valuations.

Exposure to these fundamentally sound blue chip stocks makes sense, as there is visibility for healthy total returns (capital gains and dividends) over the long term. Let’s discuss why these top-notch stocks are worth considering.


Newmont (NEM)

Source: Piotr Swat/Shutterstock

As I write this article, gold has jumped to $1,930 per ounce. Given the lingering concerns in the banking sector, lingering inflation and the heightened possibility of a recession, I expect this bullish momentum to continue. Newmont (NYSE:NMS) is a quality gold miner to consider adding, for exposure to precious metals price action right now.

Currently, NEM shares are trading at a forward price/earnings ratio of 21.2x, with a dividend yield of 3.5%. Given the upside potential for gold prices, I expect healthy dividend growth in 2023 and beyond.

Newmont Corporation has a superior balance sheet and a quality asset base. With 96 million ounces in reserves, the company expects steady production into the 2040s. Newmont also hopes to reduce its all-in sustaining cost over the next few years. So the increase in the company’s free cash flow is likely to be significant if gold is trending higher.

It should also be noted that Newmont closed 2022 with a liquidity buffer of $6.7 billion. In addition, the company’s debt ratio is low, at 0.5. With great financial flexibility, I wouldn’t be surprised if the company pursued opportunistic acquisitions to boost production.

Albemarle (ALB)

Albemarle (ALB) logo on the screen of a mobile phone

Source: IgorGolovniov/Shutterstock.com

Albemarle (NYSE:ALB) is a massively undervalued blue-chip stock. I expect ALB stock to double over the next 12 months. To put things into perspective, the stock trades at a forward price-to-earnings ratio of 7.2x and is among the top dividend growth stocks to consider.

The company’s undervaluation is evident when investors assess Albermarle’s growth trajectory. Last year, Albemarle posted 193% and 444% year-over-year growth in sales and adjusted EBITDA, respectively. The company has guided sales growth of 55% to 75% for the current year. The company will also likely post operating cash flow of $2.2 billion for the year. With these measures, the title deserves better valuations.

Another point worth mentioning is that Albemarle closed 2022 with a lithium conversion capacity of 200 ktpa. The company plans to increase production to 550 ktpa (median forecast) by 2027. With continued capacity increases, cash flow growth should remain healthy over the long term.

Herringbone (CVX)

Chevron logo on blue sign in front of skyscraper

Source: Jeff Whyte/Shutterstock.com

Chevron (NYSE:CLC) is another name to consider among undervalued blue chip stocks. With a forward price/earnings ratio of 10x, the stock is poised for a significant upside from current levels. Additionally, CVX stock offers a rather hefty dividend yield of 3.9%.

It should be noted that oil fell due to recession fears. However, CVX stock has held firm, trading sideways for the past six months. This is an indication of the stock’s undervaluation. Once the economic headwinds subside, CVX shares can easily trade above previous highs of $190.

From a fundamental perspective, Chevron is among the best oil and gas stocks. The company has an investment-grade balance sheet, backed by operating cash flow of $47.5 billion for 2022.

With low breakeven assets, I think operating cash flow should remain robust, even taking into account the recent drop in oil prices. This will continue to allow Chevron to create value through dividends and share buybacks. Additionally, the company has great flexibility to make large capital investments to improve its metrics over time.

As of the date of publication, Faisal Humayun does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Faisal Humayun is a senior research analyst with 12 years of experience in credit research, equity research and financial modeling. Faisal is the author of over 1,500 stock-specific articles focused on the technology, energy and materials sectors.


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