5 Blue Chip Bargains With Strong Free Cash Flow And Fundamentals: 4 Buys And 1 Sell

|
 |  Includes: AXP, BAC, CSCO, HPQ, JPM
by: David Alton Clark

Overview

The stocks covered in this article are considered blue chip stocks. According to the New York Stock Exchange, a blue chip is a stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. These five blue chip stocks are trading at less than 15 times free cash flow which is considered undervalued. Furthermore, the stocks are profitable and have below average P/E ratios. All five have PEG ratios around one. These characteristics seem to imply the stocks are undervalued.

The question is... is it really time to buy? A stock that appears to be a bargain based on fundamentals but has no near term catalyst for recovery could be dead money for quite some time. The fundamentals trap investors into buying the stock and it never improves. Sector, industry or company specific headwinds may be on the horizon which have not been factored into current prices yet. You can not rely on one aspect of a stock to determine whether it is time to buy or sell.

In the following sections we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any up or downside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Tuesday's performance for the stocks.

(click to enlarge)Click to enlarge

American Express Company (AXP)

(click to enlarge)Click to enlarge

AXP is trading at 5.66 times free cash flow. The company is trading just 8% below its 52 week high and has 11% upside potential based on the analysts' consensus mean target price of $62.42 for the company. AXP was trading Tuesday for $56.08, slightly down for the day.

Fundamentally, AXP has several positives. The company has a forward PE of 11.86. AXP has a net profit margin of 15.14% and a PEG ratio of 1.25. AXP has a ROE of 26.50%. EPS for the next five years is expected to rise by 11%. The company pays a dividend with a 1.43% yield.

Technically, the stock is at an inflection point. The stock is trading slightly below the 50 day sma and 5% above the 200 day sma. The chart reveals the stock is in a descending triangle formation which is bearish. The stock should break out of this pattern soon. Most stocks in this pattern break to the downside.

93% of Street analysts have a buy/hold call on AXP. Nevertheless, Hedgeye's Josh Steiner remains bearish on the stock and sees growth slowing. The comment below from AXP CEO Ken Chenault underpins Steiner's thesis:

There is no one specific driver of the recent trend; the Company's billed business in July appears to reflect a weak overall economic environment, which shows up in a number of areas, including small business and corporate spending. On most measures that we evaluated.

With slowing growth and the technical status of the stock, I have to put AXP in the penalty box. The stock is a sell at current levels.

Bank of America Corporation (BAC)

(click to enlarge)Click to enlarge

BAC is trading for 5.92 times fee cash flow. The company is trading 23% below its 52 week high and has 20% upside potential based on the analysts' consensus mean target price of $9.33 for the company. BAC was trading Tuesday for $7.78, up almost 1% for the day.

Fundamentally, BAC has several positives. The company has a forward PE of 8.37. BAC has a net profit margin of 11.62% and a PEG ratio of 1.17. BAC is trading for approximately one third of book value. EPS next year is expected to rise by 66%. Insider ownership is up 76% over the past six months.

Technically, BAC is exhibiting positive characteristics. The stock just recently broke out to the upside. The stock is trading above its 50 and 200 day smas.

Nonetheless, the bad news just keeps on rolling in for BAC. A former BAC employee yesterday testified in a trial of three UBS execs that he conspired to rig bids in the municipal reinvestment market with them. On top of that, the FDIC filed suit on Friday against 11 major banks for allegedly misrepresenting the quality of the loans that were packaged together in over $388M of mortgage bonds sold to Alabama-based Colonial Bank.

I am going to change my stance on the stock and call it a buy at this level. The stock has continued to rise in the face of all the bad news. This tells me most of the damage has been done. The bad news has been priced in to the stock. This is definitely a long term call. BAC has bottomed and is a buy at this level.

Cisco Systems, Inc. (CSCO)

(click to enlarge)Click to enlarge

The company is trading at 10.51 times free cash flow. The company is trading 19% below its 52 week high and has 23% potential upside based on the analysts' consensus mean target price of $21.13 for the company. Cisco was trading Tuesday at $17.17, down almost 1% for the day.

Cisco is vastly undervalued based on fundamentals. Cisco's quarter over quarter EPS and sales growth rates are 22% and 7% respectively. Cisco's net profit margin is 16.14%. Cisco's ROE is 14.93% and the company pays a dividend with a yield of 1.86%

Technically, Cisco is has been performing well since bouncing off a low of 15 in late July. The stock has posted higher highs and higher lows since that time. The stock has broken through resistance at the 50 day sma which is bullish.

Here is the deal on CSCO. The CEO John Chambers is the poster child for under promise and over deliver. The problem is CSCO hasn't been over delivering lately because of the downturn in Europe. I posit the need for security improvements as the growth of people transacting on their mobile devices will soon outweigh the impact of Europe. Who knows maybe Europe will even start to turn around. Cisco's issues are transitory. The stock is a buy at these levels for the long haul.

Hewlett-Packard Company (HPQ)

(click to enlarge)Click to enlarge

HPQ is trading for 10.01 times free cash flow. The company is trading 42% below its 52 week high and has 32% potential upside based on the analysts' consensus mean target price of $25.62 for the company. HPQ was trading Tuesday for $19.36, down over 1% for the day.

HPQ fundamentals are mixed. The company has a forward PE of 4.47. HPQ pays a dividend with a nearly 3% yield. On the other hand, EPS for the next five years is expected to only rise by 4.52%. Sales and EPS are down quarter over quarter and the company's net profit margin is a measly 4%.

Technically, HPQ is has broken out to the upside out of a descending triangle formation. This is positive. The stock has hit a major resistance level at the 50 day sma. The stock is currently trading 1.8% below the 50 day.

IDC's Crawford Del Prete thinks HPQ $8B services write-down is good news for the company. He sees it indicating HPQ is trimming the fat from the division as part of its restructuring. At the end of the day, HP is able to tell investors that these cuts are boosting the bottom line. HP raised the outlook for Q3. Its non-GAAP EPS is $1.00, up from $0.94-$0.97.

Del Prete says,

They raised their guidance. It's important to note that. What I've been wanting to see is stabilization. They raised guidance so it shows their business is stabilizing. They are starting to see benefits from some focus and retrenching.

This is the news I've wanted to hear from HPQ as well. Upping the guidance is a huge move for Meg Whitman. I did not expect this. I am contemplating starting a position in the stock prior to earnings. I posit the stock will run up into the earnings announcement on August 22nd.

With Meg changing her tune, the stocks strong fundamentals and the stock performing well technically, I am taking HPQ out of the penalty box. The stock is a buy here.

JPMorgan Chase & Co. (JPM)

(click to enlarge)Click to enlarge

JPM is trading for a ridiculous 1.79 times free cash flow. The company is trading 19% below its 52 week high and has 21% potential upside based on the analysts' consensus mean target price of $44.84 for the company. JPM was trading Tuesday for $37.10, up slightly for the day.

JPM fundamentals are solid. The company has a forward PE of 7.08. The company has a 20% net profit margin. JPM pays a dividend with a 3.3% yield. Nonetheless, EPS for the next five years is expected to only rise by 7.15%. Sales and EPS are down quarter over quarter.

Technically, JPM is has broken out to the upside since hitting a low of $30. This is positive. The stock has broken through the 50 and 200 day smas and has been trending higher since June.

JPMorgan has been in the penalty box since the London whale travesty. Based on the current technical and fundamental status of the company, I believe the bad news has been priced into the stock. The stock has definitely bottomed. Jaime Dimon is one of the best CEOs in the banking industry, if not the best. His mastery of the senate and congressional hearings was amazing to watch. I have faith he will lead JPM back from the brink. JPM is a buy here.

The Bottom Line

Sometimes a bargain is bargain and sometimes it is not. Starting off with blue chip stocks takes some of the downside risk out of the equation; nevertheless, you must always dig deeper to see what the future may hold. Everything is not always as it appears.

Most of these stocks are in the process of rebounding off a bottom while AXP is closer to its top and may be running out of steam. AXP may have peaked for the year if they do not turn things around. This is the one stock I would avoid at this time.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM, HPQ, CSCO, BAC over the next 72 hours.