Top 3 Cheapest Blue Chip Stocks to Buy Now? (2019 Review)
This article will examine a popular topic for many investors: the cheapest blue chip stocks.
Blue chips stocks are often considered core holdings in long-term diversified portfolios. The general idea is that these are legacy companies that are “quality investments”, leaders in their field, and have massive market capitalizations.
Most blue chip stocks pay a dividend, and probably raise that dividend frequently, while also returning capital to shareholders by repurchasing oodles of stock.
You’ll find blue chip stocks in most every large-cap mutual fund or ETF, and almost all of them will have names you recognize.
Blue chip stocks are often major components in the major indices, like the S&P 500 or NASDAQ Composite, and are often synonymous with the term “safe investment”.
The Cheapest Blue Chip Stocks For 2019
If you’re in a hurry, below are our picks for the lowest priced blue chips stocks as of this writing.
- Apple: Despite its market cap, it remains cheap on a valuation basis.
- Alphabet: The high flying search engine company has sold off enough to make it a bargain.
- Visa: Part of an oligopoly that has gigantic market share.
Keep reading and you’ll find out more about these inexpensive blue chip stocks and my thoughts on each.
What Are Blue Chip Stocks?
The idea of “blue chip stock” has not changed over the years, but I would argue that the name should be changed.
Generally, blue chip stocks are considered to be large, stable, and financially solid famous companies that are household names, and probably are leaders in their sectors.
They have many years of growing and reliable earnings, have huge market, and are often considered core portfolio holdings. They also tend to have higher profit margins than competitors because of their history and market share, and often carry more cash than debt.
They also usually pay a dividend.
For all those reasons, they are considered “safe”.
I disagree about this term “safe”, though. Many blue chip stocks have been soaring, as investors piled into them from bonds, seeking to replace the yields that bonds no longer offered.
As a result, many blue chips stocks aren’t “safe” because they are expensive.
Fortunately, many aren’t, and I have some choices in this article that I believe are the cheapest blue chip stocks.
How Do You Determine What Qualifies As The Cheapest Blue Chip Stocks?
The cheapest blue chip stocks have at least two of these three characteristics:
- A very high cash position
- An adjusted PEG ratio of 1.5 or less.
- Strong growth with limited competition
High cash position
Having a lot of cash in the bank is not always a good thing for a company. Shareholders want to see cash put to use.
However, the truth is that having a strong cash position gives a company flexibility. If it blew all its cash, it wouldn’t have it if the economy suddenly turned bad. It also wants cash if there’s a strategic purchase it can make.
It also allows investors to back out that net cash position in a valuation calculation, so investors can see what the business itself is truly worth.
Adjusted PEG ratio of 1.5 or less
The PEG ratio is the P/E ratio of a stock divided by its earnings growth. For me, a PEG ratio of 1.0 or less means the stock is a bargain. However, I make up to four adjustments.
I permit a 10% premium for companies with a strong cash position, another 10% for companies with world class brand names, and 10% for companies with very strong cash flow.
If a company is growing earnings at 15% or more, I permit a PEG ratioof up to 1.5. That’s because the company is considered a growth stock, and growth stocks are generally not going to be considered value plays as well.
Strong growth with limited competition
Sometimes stocks, even blue chips, can be cheap for a reason. Perhaps business is terrible. Maybe the company is losing its competitive edge. Maybe execution isn’t as good as it used to be.
That’s why the company needs to have strong relative growth so that those elements don’t come into play.
I also want to see a business that is such a leader that it crushes its competition.
What is it?
Apple is, of course, known for its computers and iPhones, as well as its iPad, iCloud services, Apple Pay, iTunes, and numerous other computer-centric products.
What makes it a cheap stock?
Apple is one of strangest stocks I’ve ever invested in. It has performed incredibly well over the past twenty years, and at one point has a market capitalization of over a trillion dollars.
Yet almost every time I run a valuation check on it, Apple stock always seems to be cheap. Its growth in earnings has been so phenomenal, its cash flow so tremendous, and its balance sheet so perfect, that the stock never really gets too far ahead of itself.
Apple’s cash position is insane – it has $143 billion in net cash, after backing out long-term debt.
Its market cap, net of that cash position, is $660 billion. With $59.5 billion in net income in the last twelve months, it thus trades at a P/E ratio of 11. Yet analysts project 13% annualized earnings growth over the next five years, giving it a PEG ratio of just about 0.8 – and that’s before giving it the 30% premium for having all the elements listed above.
That’s not only a cheap stock, it’s one of the cheapest blue chip stocks in the entire market.
Read Also: Our Apple Stock Price Prediction
What is it?
Alphabet is primarily known for, and driven by, online search engine advertising. It is essentially a digital billboard. While it does have other divisions, advertising is really its bread and butter.
What makes it a cheap stock?
Alphabet stock is very similar to Apple, in that it frequently remains an undervalued stock, despite its meteoric rise.
Let’s point out that the Google search engine has effectively wiped out any competition. It has maintained about 90% market share for years, with Bing only at 4%. With that kind of monster market share, it can charge advertisers extraordinary rates. Nobody can compete with Google search traffic.
Alphabet has $113 billion in net cash, after backing out debt. That’s incredible. When we subtract that from the market cap, we find Alphabet’s business is worth $630 billion, just a bit less than Apple.
Alphabet made about $29 billion in net income over the past year, after adjusting for the additional taxes that resulted from the Trump tax legislation. That means Alphabet’s business trades at 21x earnings.
Analysts project a 5 year annualized growth rate of 15.2%. However, Alphabet gets a 30% premium for its great cash position, world class brand name, and great cash flow (about $23 billion last year). Thus, the adjusted growth rate is 19.7%.
Alphabet comes in with a adjusted PEG ratio of 1.07. That also makes it one of the least expensive blue chip stocks.
What is it?
Most people think of Visa as a credit card processor, which it is. However, these days it is better to think of it as a “transferor of value and information” between merchants, consumers, businesses, and governments.
What makes it a cheap stock?
Visa is part of an oligopoly– a small number of companies that control an entire market. There are very few payment processors out there, and Visa is killing it with 52.7% market share. Next in line is Mastercard with 21.9%, then American Express with 21.8%, and finally Discover with a mere 3.8%.
Visa has very little competition, and dominates the market.
Visa also has a massive cash position of $15.7 billion. That’s because Visa’s business is not at all capital intensive. It is essentially a cash generation machine, and you can see that in its cash flow statement.
It’s astonishing to see that Visa generated about $6.47 billion in free cash flow in 2015, and ran it up to $12 billion this year.
Visa generated net income of $10.3 billion in the past year. It trades at 30x last year’s earnings and 25x next year’s earnings. Analysts project a five year annualized earnings growth rate of 18%.
Visa gets the 30% premium mentioned above, which means a reasonable growth rate would be 23.4%. As a growth stock, I permit a PEG ratio of up to 1.5, and it’s PEG ratio is only 1.1, making it one of the cheapest blue chip stocks.