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You can’t go wrong with blue-chip stocks. High quality, with solid balance sheets, consistent earnings, and deep economic moats, they make some of the best stocks to own whether we are in a bull market, or a bear market. But, don’t conflate the dependable nature of these stocks with them being dull and stodgy.
Many blue-chips continue to set the world on fire when it comes to earnings. And, not just the “big tech” blue-chips that have been crushing it since the novel coronavirus first made headlines. On the heels of the post-pandemic recovery, blue-chip names in the industrial and service sectors in the economy also beat expectations with their quarterly results.
Shares in the most venerable companies may be commanding historically high valuations right now. That may have you worried that today’s frothy forward multiples won’t last for long. That is, even with better-than-expected earnings results, richly-priced stocks (blue-chips included) are headed for a correction.
Yet, with the Federal Reserve’s aggressive monetary policy here to stay (at least for the next few years), bears banking on a big correction may be still left twiddling their thumbs. In the meantime, the well-established names crushing projections will likely continue to trend higher.
So, which blue-chip stocks with strong earnings should you keep an eye on? Consider these eight some of the best:
- Caterpillar (NYSE:CAT)
- Facebook (NASDAQ:FB)
- Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL)
- Johnson & Johnson (NYSE:JNJ)
- Lockheed Martin (NYSE:LMT)
- 3M (NYSE:MMM)
- Microsoft (NASDAQ:MSFT)
- UnitedHealth Group (NYSE:UNH)
Blue-Chip Stocks: Caterpillar (CAT)
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Machinery giant Caterpillar has knocked it out of the park twice in a row when it comes to quarterly earnings results. For the quarter ending Dec 31, 2020, the company beat consensus estimates by margin of 42% ($2.12 per share actual versus $1.49 per share estimate).
And, this most recent quarter, ending Mar 31, 2021? It delivered an even more stunning earnings beat. The sell-side projected $1.94 per share in earnings. But, actual results beat this estimate by nearly 48%, coming in at $2.87 per share. How have markets reacted?
CAT stock is up around 45% over the past six months. But, since hitting prices around $225 per share, the rally leveled off. Although its earnings are expected to grow by nearly 20% between this year and the next, today’s valuation may be a bit rich for investors. Especially considering the more cyclical nature of this capital goods company, relative to more recession-resistant blue chip stocks.
So, what’s the best move with Caterpillar, as its share price remains strong, on the heels of its recent earnings? Future gains may take some time. But, hold onto it if you own it. And, give it a closer look if you don’t just yet.
Facebook (FB)
Source: rvlsoft / Shutterstock.com
What was behind the big rip in FB stock on the last trading day of April? The social media giant and FAANG component’s headline-making quarterly results. For the preceding quarter, it saw its sales soar 50% year-over-year (incredible for a company its size).
Earnings came in at $9.5 billion, or $3.30 per share. Nearly a dollar (96 cents) above analyst estimates. Shares may have seen a nice bump on these numbers. On top of its 50%+ upward run in the past 12 months. But, don’t think we’ve seen investor excitement for Facebook shares peak.
How so? For starters, FB stock is reasonably priced for a high-profile FAANG name. Its current forward 25x price-to-earnings (P/E) ratio seems conservative, considering it’s set to experience double-digit percentage earnings growth over the coming years. Its fellow big tech blue-chip peers sport forward multiples topping 30x. And some of them are growing at a much more gradual clip.
Digital ad revenue, Facebook’s bread-and-butter, has clearly made a comeback. With its growth in other areas (like e-commerce and virtual reality) still just getting warmed up, there’s plenty in play to propel the company’s results in the years ahead. And, in turn, its share price, which relative to its prospects remains more than reasonable.
Blue-Chip Stocks:Alphabet (GOOG, GOOGL)
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Like with Facebook, a strong digital ad market has lead to blockbuster results for this other major internet powerhouse. As our own Luke Lango recently put it, Alphabet (the parent company of Google, YouTube, and other major platforms) is clearly benefiting from the global economic re-opening.
With sales overall rising by 32%, and its operating income doubling year-over-year, this $1.65 trillion (based on its market capitalization) stock is still far from hitting its growth wall. So, what does that mean for GOOG stock going forward? Could shares hit $3,000 per share, which Lango says is the stock’s next step?
I agree that shares stand to hit the $3,000 per share price level (around 24.5% above today’s price of around $2,400 per share) sooner rather than later. Again, like with Facebook, value is fairly reasonable with Alphabet shares. It too trades at the lower end of forward P/Es among the FAANG stocks, along with Microsoft.
In addition, as I’ve put it myself previously, GOOG stock offers investors an interesting combination. That is, it’s a high quality, blue-chip business, but with great optionality thanks to its “other bets” unit. If any of its “other bets,” like self-driving play Waymo, hit a home run, this could keep things moving in the right direction for this, the fifth largest company in the world by market cap.
Johnson & Johnson (JNJ)
Source: Alexander Tolstykh / Shutterstock.com
The controversy behind its Covid-19 vaccine, and its recently-lifted pause, may be making the most headlines for Johnson & Johnson. But, in the grand scheme of things, it likely doesn’t matter much for the long-term future of its stock.
Yes, having one of the three vaccines currently being rolled out in the U.S. is an achievement. Especially as scores of vaccine contenders remain far behind. But, with just a relatively small percentage of its sales this year likely coming from its vaccine candidates, consider it a secondary factor to consider.
What should be more top of mind among investors in JNJ stock, however, is the company’s earnings beat, announced back on April 20. Compared to some of the other blue-chip stocks mentioned here, its sales growth may be a bit more modest. But, handily exceeding expectations ($2.59 per share actuals, versus estimates of $2.34 per share), it’s certainly nothing to sneeze at.
The company’s consumer product unit (which includes over-the-counter products like Listerine mouthwash) may have seen a slight slip in sales last quarter. But, strong sales in J&J’s pharma and medical devices units saved the day. And, in the quarters ahead, we could see solid results yet again, which could give this stock additional boosts.
Blue-Chip Stocks: Lockheed Martin (LMT)
Source: Ken Wolter / Shutterstock.com
After last year’s “blue wave” U.S. election results, the specter of a Democratic party-controlled government gave investors pause about defense contracting plays like LMT stock. But, realizing the Biden administration didn’t mean “game over,” investors started to bid up the stock once again starting in March.
Since then, shares climbed from around $340 per share to around $387 per share today. Shares may have pulled back in the weeks following its most recent earnings report. Yet, taking a closer look at these numbers, and you can make the case that this blue-chip stock, still undervalued by the market, has substantial room for gains in the near term.
What do I mean? Sure, quarterly earnings coming in at $6.56 per share, versus $6.31 per share estimates, isn’t exactly jaw-dropping. It’s more a moderate beat than a full-on “crushing it” scenario. But, with the company continuing to up full-year earnings estimates, we may see additional better-than-expected numbers in the quarters ahead.
In turn, this could fuel additional investor enthusiasm for LMT stock. As I said, with shares at a forward P/E of 14.3x, it’s undervalued compared to other high-quality names. The defense contracting sector can be a bit more feast or famine than with other kinds of blue-chip stocks. Yet, a good deal valuation-wise, and offering up a 2.73% dividend to boot, there’s more than moderately strong earnings helping to build the bull case for shares.
3M (MMM)
Source: JPstock / Shutterstock.com
To say 3M stock underwhelmed investors in the late 2010s is an understatement. Its dividend aristocrat status notwithstanding, a lack of growth led shares to experience a multi-year pullback from $250 per share down to prices under $125 per share between 2018 and 2020.
But, if there’s been a company that’s been “building back better” in the aftermath of the virus, it’s been MMM stock. Shares are up about 60% off their pandemic lows, as continually strong earnings have helped to rebuild investor confidence in its prospects.
Will this continue to be the case? I’ll concede that there’s an element of uncertainty. Shares as of late have pulled back, due to the company’s underwhelming guidance for the quarters ahead. As it may be a situation where markets overreacted to 3M’s improved fortunes, we may see additional pullback before this stock takes off again.
That’s not encouraging news for those who have bought in at its near-$200 per share prices. Yet, a moderate pullback (say, to around $175 per share) may open a great entry point for a long-term position. Guidance may be giving many pause. But, still sporting a modest valuation for an established industrial conglomerate, and still offering up its aristocrat-status dividend (forward yield of 3% as of this writing), there’s still more positives than negative at play with 3M stock.
Blue-Chip Stocks:Microsoft (MSFT)
Source: NYCStock / Shutterstock.com
Everyone’s well aware of Microsoft crushing it thanks to the cloud. But, the cloud megatrend, something that moved the needle for scores of tech plays (large and small) last year, is still in play. That’s apparent from the company’s latest earnings report, released late last month.
Beating the sell-side’s top line and bottom line estimates, the cloud computing trend is showing no signs of slowing down. And, with this company’s heavy exposure to it (via its Azure unit, plus its cloud-based Office365 platforms), it still seems like it’s blue skies ahead for Microsoft.
But, does this mean that MSFT stock, after its 40% plus surge over the past year, can again deliver above-average gains for investors? Yes and no. On one hand, with trends still its friend, expect the big tech behemoth to continue exceeding expectations. On the other hand, you can argue all of this (and then some) is reflected in its stock price.
Trading for 32.5x earnings, Microsoft shares trade at a premium to both Alphabet and Facebook. Despite this company having lower earnings growth projections than the latter two. Watch out for a negative reassessment of this stock’s valuation. But, with its high-quality, along with the cloud megatrend, it’s probably not wise to bet against it.
UnitedHealth Group (UNH)
Source: Ken Wolter / Shutterstock.com
Healthcare colossus UnitedHealth is yet another of the blue-chip stocks knocking it out of the park with earnings as of late. The company handily beat estimates, with its $5.31 per share in quarterly earnings.
These strong results may have given the stock a small boost when the numbers hit the street April 15. But, admittedly, UNH stock may have trouble holding above the $400 per share price level. Healthcare stocks have underperformed the market so far this year. To some, this may signal a big rebound is due, as the post-pandemic recovery continues.
However, with this stock’s current P/E ratio at historical levels, there may not be much room for any sort of multiple expansion. So, is that a deal breaker? Not exactly. With the accompanying boost to its 2021 guidance, which calls for adjusted earnings as high as $18.60 per share, earnings growth, both this year, and in 2022, may be enough to produce solid returns over the next few years.
After its stock price recovery in 2020, we may see less dramatic gains for UNH stock in the years to come. But, as a blue-chip name, in an industry less vulnerable in an economic downturn, consider this another yet another high-quality name to make a long-term holding.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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