At a glance, the market might appear overvalued as the S&P 500 approaches 2023 highs. However, in the past year, the performance has been quite bifurcated, with the Magnificent 7 soaring while most of the other 493 stocks have lagged. Yet, even among the laggards, there are several blue-chip stocks to consider.
While 2023 leadership has come from technology and the artificial intelligence buzz, 2024 might be a different year. Remember, several factors might influence markets: the economy, inflation, Federal Reserve policy, and the upcoming U.S. elections could all play a role.
For instance, investors expect the Fed to cut rates in May. However, investors have previously made this call and ended up disappointed as the Fed kept hiking rates. Indeed, entering 2023, consensus expectations were for rate cuts to begin in the second half. If the Fed stays higher for longer, the stock market will experience higher volatility.
Blue-chip stocks can protect your portfolio in a highly volatile market. Below, we highlight three undervalued blue-chip stocks that could be winners. Although their performance disappointed in 2023, they still generate massive free cash flow and soon, the markets will appreciate their high profitability with shareholder returns.
Starbucks (SBUX)
Well-known beverage chain Starbucks (NASDAQ:SBUX) has had a year to forget. As of writing this article, the stock hovers around $97 after a rapid decline from its mid-November highs. Lately, fears around its expansion into China’s market have led to the stock’s downfall.
However, SBUX is still one of the undervalued blue-chip stocks to buy. Despite having over 36,300 global locations, its growth story is far from over. In particular, the beverage giant sees store growth opportunities in China. While the growth been bogged down by the delayed recovery in China, the company expects to open eight new stores daily in the country over the next seven years.
Additionally, the firm expects more sales from its existing customer base thanks to an impressive 75 million Starbucks Reward Members worldwide. The company plans to capture more value out of its loyal customer base. In particular, they’re looking to grow through higher food “attach” rates, meaning the company intends to sell more food per cup of coffee. And, to top it all off, the company has been improving operating efficiencies with store renovations and modernized supply chains.
These four earnings drivers will be vital to the company’s growth. On reporting fourth-quarter results, management reiterated long-term growth plans for 10-12% sales growth and 15-20% EPS growth. If the company hits these targets, SBUX stock will be a great compounder.
Exxon Mobil (XOM)
Amid the precipitous drop in crude oil prices, energy stocks have been under severe pressure. All this leaves Exxon Mobil (NYSE:XOM) undervalued and ready for timely investors to buy in. Currently, the oil giant has one of the lowest production costs and can profit from $40 per barrel oil. Furthermore, it has a robust balance sheet to navigate a cyclical downturn.
XOM stock is a bargain for several reasons. First, oil prices will enjoy a mechanical boost due to additional voluntary production cuts from OPEC members. The reductions, amounting to 2.2 million barrels per day, will last through the first quarter of 2024.
Additionally, management expects long-term demand for oil to remain stable. As CEO Darren Woods stated in a recent CNBC interview, economic growth will support demand, especially in emerging markets. He also noted that reserves are depleting with each barrel of oil extracted, supporting longer-term oil prices.
Lastly, Exxon is one of the most undervalued blue-chip stocks based on valuation. As of this writing, its trailing price-to-earnings is 10. On a free-cash-flow basis, it trades at a multiple of 10 times. Plus, you earn a 3.7% dividend yield as you await capital appreciation.
Management also thinks the stock is undervalued. On Dec. 6, it raised its share repurchases to $20 billion per year after the Pioneer Natural Resources (NYSE:PXD) close through 2025. XOM stock is a bargain and share repurchases will support the stock.
Citigroup (C)
Citigroup (NYSE:C) has been the worst performer among U.S. money center banks over the past decade. So, why is it one of the undervalued blue-chip stocks to buy? The investment case hinges on the turnaround plans by CEO Jane Fraser.
After years of underperformance in stock price and metrics such as return on equity, management is undertaking an ambitious turnaround plan. The bank has begun shedding off non-core and less profitable international assets.
CEO Jane Fraser has announced plans to exit several international markets to streamline operations and increase efficiency. Citigroup will exit 14 consumer markets across the globe. For example, it has announced plans to leave the Mexican and South Korean markets.
Also, the company has announced plans to lay off employees in a corporate structure overhaul. The move is meant to reduce Citi’s ballooned overhead. The bank is reducing its management layers from 13 to 8. After reducing management-level employees, the layoffs will move to lower-level employees.
Overall, Citigroup aims to reduce headcount by 10%. These layoffs are essential if the bank is to meet its 11-12% return on tangible common equity target. What’s more, management believes this reorganization will enable the bank to serve clients better.
As of this writing, Citigroup is one of the most undervalued blue-chip stocks. While peer JPMorgan Chase (NYSE:JPM) trades at 1.58 times price-to-book value, C stock trades at only 0.49 price-to-book. If these cuts and reorganizations improve performance, the stock will re-rate higher.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.