Among various techniques to screen stocks to buy, the price-earnings ratio is a good indicator to consider. In simple terms, it’s the amount an investor is willing to pay in the market for every dollar of earnings for a particular company. Of course, it’s not the only valuation indicator out there, and a company’s price-earnings (or P/E ratio) can vary between growth and blue-chip stocks. However, for established companies with steady cash flows, this metric is very useful from a valuation perspective. For growth stocks, the price-earnings-to-growth ratio is often a better indicator.
That said, it’s not just growth stocks that are subject to periodic overreactions by the market. Even blue-chip stocks can witness sharp corrections that provides a good long-term buying opportunity. The focus of this column is on blue-chip stocks to buy at a forward P/E of less than 10. I believe that these stocks are poised to deliver 50% to 100% returns in the next 24 months.
Let’s discuss the why these stocks are interesting at current levels.
Pfizer (NYSE:PFE) stock kicks off this list of stocks to buy with a forward P/E under 10. This mega-cap pharmaceuticals currently trades at a forward P/E of around 7, while also offering investors an attractive dividend yield of 3.64%. Thus, PFE stock seems seriously undervalued on both a valuation and dividend basis, even when factoring in the fact that revenue from Covid-19 vaccines sales will likely decline in 2023.
If we look at the company’s long-term picture, Pfizer has several growth catalysts. First, the company has an attractive late-stage pipeline of drug candidates. As these drugs are commercialized, revenue growth will be supported. Last year, Pfizer guided for a mid-range of $11 billion in investment in research and development. As investments remain robust, the company’s pipeline will remain deep.
Furthermore, Pfizer reported strong free cash flows from vaccine sales over the past 18 months. This surge in cash flowhas provided the company with ample financial flexibility for acquisitions. In fact, Pfizer has already been aggressive on this front. Pfizer expects $25 billion in incremental risk-adjusted revenue from new business development by 2030.
Increasing its presence in low-income countries will also serve as a growth catalyst in the coming years. With these positives, PFE stock seems undervalued and among the top blue-chip stocks to buy right now.
Over the past 12 months, AT&T (NYSE:T) stock has been among the out-performers in the market. This stock has actually appreciated roughly 20%, despite a rather widespread market decline over this period. That said, despite relatively strong price action, T stock still trades at a forward P/E of 7.3-times. Accordingly, considering the company’s 5.8% dividend yield, I expect more upside could be on the horizon.
The reason for AT&T’s relatively low valuation has been the company’s debt load. The company has spun-off its media division, reducing its net debt by $25 billion in the first nine months of 2022. Additionally, it’s expected this deleveraging will continue, which should, in theory, boost T stock over the long-term.
It’s worth noting that between 2016 and 2022, AT&T invested $105 billion in wireless and wireline networks. Even beyond this period, investments have remained robust. Thus, it’s the pace of investment relative to cash flow generation investors will be watching. How much future growth can be generated organically is the key question here.
That said, it’s clear AT&T’s core investments are yielding results in the form of sustained subscriber growth. For Q3 2022, the company reported its best revenue growth in a decade in the wireless services segment. As 5G penetration increases, AT&T is positioned to benefit.
Vale (NYSE:VALE) is another seriously undervalued stock to buy. Even after a meaningful rally of 42% in the last six months, VALE stock trades at a forward P/E of 5.2-times. Additionally, the stock offers a dividend yield of 4.1%, which is reason enough for many investors to buy this stock.
With fears of global recession, it’s likely that countries like China will pursue stimulus. That’s a big catalyst for Vale, as I expect commodity prices to remain firm. As a matter of fact, iron ore has already been trending higher, and that at least partially explains the recent rally in VALE stock.
For Q3 2022, Vale reported adjusted EBITDA of $4.0 billion. With iron ore trending higher, annualized EBITDA visibility can be reasonably expected to come in around $20 billion. Thus, with robust cash flows, Vale is well-positioned to invest in growth projects.
I am particularly bullish on the company’s focus on base metals, including nickel and copper. These metals are likely to find strong demand in a low carbon economy.
It’s worth noting that Vale has also been deleveraging, which will amplify the positive effects of organic cash flow growth in the near-term. This is a stock that’s poised to deliver incredible shareholder value, and one I think needs to be on investors’ radar right now.
On the date of publication, Faisal Humayun 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.