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4 Top Blue Chip Value Stocks to Buy Now for 2018
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It has been more than 10 years since value has outperformed growth on a relative basis, but there are some on Wall Street that feel that in an aging bull market, there could be demand for value stocks in 2018. Remember, value stocks tend to trade at a lower price relative to its fundamentals, typically dividends, earnings and sales. Common characteristics include a high dividend yield, low price-to-book ratio and low price-to-earnings ratio.
We screened the Merrill Lynch research universe looking for companies that have value characteristics, are rated Buy and also pay dividends. We found four companies that fit the bill pretty well. All make good sense for stock investors looking to lower risk in a market that is trading at about 18 times forward earnings.
General Electric
This iconic blue chip industrial was a huge laggard in 2017, and after cutting its dividend the most since the Great Depression it may be offering long-term investors a very promising entry point. General Electric Co. (NYSE: GE) is a highly diversified, global industrial company. Its businesses are organized broadly under these segments: Power, Renewable Energy, Energy Connections, Oil & Gas, Aviation, Healthcare, Transportation and GE Capital.
The company’s products and services include power generation equipment, aircraft engines, locomotives, medical equipment and compressors. Over half of the business is tied to service and aftermarket support.
The road back for GE can be a long one, but the chances of the company ever going out of business are very remote. Merrill Lynch said this after the company held its analysts day back in November:
We lower our price objective to $23 (based on updated sum of the parts) but we maintain our Buy for the following reasons: 1) The dividend cut is now behind us; 2) While the company’s lower 2018 outlook versus our and consensus’ forecast was not expected, we view the current outlook as the “true reset”; 3) GE is pre funding $6 billion of its pension obligations in 2018 by issuing debt, ameliorating some of the concerns about off-balance-sheet liabilities; 4) GE did not provide a lot of detail on potential spins/divestitures beyond highlighting part of Healthcare IT, Current & Lighting, Transportation, and its stake in Baker Hughes (BHGE); however, we continue to think that the portfolio optionality goes well beyond that. 5) Our sum of the parts of $23, while lower, still points to 20%+ upside relative to the current stock price.
GE investors are now paid a 2.75% dividend. The Merrill Lynch price objective of $23 compares to the Wall Street consensus price target of $21.99. The shares traded early Tuesday at $17.65 apiece.
General Motors
This domestic car company could continue to benefit from the environmental disasters dating back to last summer. General Motors Company (NYSE: GM) is the world’s largest automaker, with annual volume of almost 10 million units. The company reports its operations in four regions: North America, Europe, South America and International. And it now relies on only four core brands in its key North American segment (Chevrolet, GMC, Buick and Cadillac).
General Motors also sells vehicles to dealers for consumer retail sales, as well as to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies and governments. In addition, it offers connected safety, security and mobility solutions, and information technology services. The company, through its subsidiary, General Motors Financial Company, provides automotive financing services.
Trading at an ultra-low 6.97 times estimated 2018 earnings, the stock makes good sense for investors looking for solid value.
Shareholders in GM are paid a very solid 3.51% dividend. Merrill Lynch has a $57 price target, and the consensus target for the stock $46.70. The shares traded at $41.35 Tuesday morning.
24/7 Wall St.IBM
This blue chip leader has been crushed and may be offering investors the best entry point in years. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.
Five major segments comprise IBM: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for raising price objectives.
The company surprised Wall Street and posted solid third-quarter earnings that sent the shares higher. Merrill Lynch noted this when the company reported:
IBM posted better than expected third quarter revenue in each of the segments, and an in-line EPS that came from operating performance. Company maintained its full year EPS guide of “at least $13.80” driven by Mainframe cycle and improving software trajectory.
IBM shareholders are paid a large 3.91% dividend. The $200 Merrill Lynch price target is well above the posted consensus target of $163.74. The shares were last seen trading at $154.55 apiece.
24/7 Wall St.Western Digital
This long-time innovator in the storage industry is a leader in the total addressable HDD market. Western Digital Corp. (NASDAQ: WDC) is an industry-leading developer and manufacturer of storage solutions that help to create, manage, experience and preserve digital content.
The company is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.
Western Digital stock traded down after earnings despite being above Wall Street earnings expectations for the fourth quarter and fiscal 2018, as investors were concerned about peak margins. Analysts feel that NAND supply-demand will not come into balance until mid-calendar 2018, creating forward upside potential.
In addition, the long-drawn dispute with Toshiba finally was put to rest, and Merrill Lynch recently said this:
The global settlement is positive as it removes uncertainty of NAND supply for Western Digital and the company gets to protect its intellectual property. The company positively preannounced the December quarter (revenue high end, margins came in better, offset somewhat by higher operating expense). Visibility has improved and management expects the flash supply/demand environment to remain healthy throughout 2018.
Trading at less than six times estimated 2018 earnings, this could be among the best technology value stocks to buy.
Shareholders are paid a 2.51% dividend. Merrill Lynch has a whopping $120 price target on the shares. The consensus price target is $115.77, and the stock traded at $80.75 a share.
Four stocks that offer investors value characteristics but also look very well positioned for 2018. All make good sense for more conservative growth and income accounts that do have a small degree of risk tolerance.
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