5 Significantly Undervalued Blue Chips

Includes: BAC, BP, CSCO, MSFT, PG
by: Neoclassical Economist

Blue chip stocks have seen their share of ups and downs this year. Here are five now trading at a discount:

Microsoft (NASDAQ:MSFT) is currently trading at just over $26/share, with a trailing P/E of 9.5 and market cap of approx. $220B. It is both interesting and surprising that Microsoft's shares have actually lost value over the last 10 years, but the company's earnings have grown over the same period of time, indicating the company may be significantly undervalued.

Positives: 3.06% dividend yield, over $56 billion in cash and short-term investments, good earnings growth, and an on-going share repurchase program. In addition, Microsoft has strong competitive advantages in most of its operations.

Negatives: investors have major concerns about future growth prospects and the likelihood that booming demand for smart phones and tablets, such as Apple Inc.'s iPad, could leave Microsoft behind. Also, there are worries about the slow pace at which Microsoft is shifting its business into cloud computing, which provides software and computing services over the Internet. However, as Tim Fidler from Ariel Focus Fund pointed out "While these are real threats to Microsoft, they are not as sharp as the market is pricing the stock. The company is priced literally like it's going out of business in five years and we just don't see that."

Procter & Gamble Co. (NYSE:PG) is a leading multinational consumer goods company. The stock currently trades at $63/share with a trailing P/E ratio of 16 and forward P/E of 13.5. The stock also offers an attractive dividend yield of 3.4%, which is slightly lower than its major competitors Johnson & Johnson (NYSE:JNJ) and Kimberly Clark (NYSE:KMB). As shown below, PG has underperformed both JNJ and KMB over the last 6 months:

Chart forProcter & Gamble Co. (<a href='https://seekingalpha.com/symbol/PG' title='The Procter & Gamble Company'>PG</a>)

However, PG appears to be at a short-term low here and I believe has plenty of upside from this level. It recently introduced Tide Pods, which the company hopes will take over the laundry market. That could very well have a big impact on profits and the company has set aside a sizeable budget for product marketing. I expect PG’s revenue to surpass the $88B in 2012 and earnings to stay above $4/share and grow by 5-6% per year. A number of analysts currently rate the stock a "Buy".

Cisco Systems (NASDAQ:CSCO) is trading at $18.03, with a 52-week range of $13.30 - $24.60. Trailing P/E is 15.5, yield at 1.3% and market cap is $96.7B. The company announces its Q1 FY 2012 earnings on November 9. Oppenheimer & Co.’s Ittai Kidron has an Outperform rating on Cisco Systems shares and a $21 price target. He expects the company will meet October estimates and “build momentum going into its January-ending quarter. He also added:

“Our contacts see balanced demand across both the US and Europe with especially strong demand in the financial vertical offsetting weakness in healthcare and the public sector. We expect Cisco to provide solid guidance for the January quarter. The majority of our contacts see improving demand across both the US and Europe driven by robust pipelines and the seasonal year-end flush. Cisco’s strong product cycle was also highlighted.”

The latest company earnings report showed profits of $0.40 a share compared to the expected $0.33 cents. Sales came in at $11.2 billion in the period, which ended July 30, compared with an estimate of $10.98 billion. Cisco simply is and has always been the dominant networking platform for the enterprise environment. I expect the stock to trade near or above $21 by year end.

Bank of America (NYSE:BAC) is trading at $6.49 a share, close to its 52-week low of $5.13. The stock is down 7.5% over the past week due to several controversial company news and decisions. The debit-card usage fee fiasco could have been completely avoided, but what’s done is done. BAC CEO Moynihan did the right thing and corrected the mistake by retracting the debit card fee. The reality is that the market does not hold grudges and I am confident the debit card fee disaster will soon be forgotten.

However, Bank of America announced late last week that it plans to issue up to 400 million shares of new common stock. The problem with that is that Mr. Moynihan declared several times throughout the year that the bank didn't need to raise additional capital, mainly in order to avoid existing shareholders. So, rightfully, some investors are starting to lose confidence in the CEO. On the other hand, 400 million new shares represent a 4% dilution which is significant but not the end of the world.

The announcement in August that Warren Buffett is buying a stake in BofA was most significant to me. What value did he see here? Investment gurus do not focus on day to day problems; they focus on the stock’s fundamentals, market share and position, and growth prospects. BAC has strong fundamentals, is very well positioned in its market and, at $6.50 a share, is seriously undervalued. While the stock price could go down more in the next few days, that would really just present a golden opportunity to follow Buffett’s example and buy the banking giant at a giant discount.

BP plc (NYSE:BP) is one of the biggest international oil and gas companies, employing approximately 80,000 people. Its operations span 29 countries, and include 16 refineries and 22,100 retail sites.

BP is currently trading at $43.85 per share, with a 52-week range of $33.62 - $49.50. Market capitalization is around $138.5 billion. Based on its trailing P/E of 5.90, a respectable dividend yield of 3.87% and a book value around $35, the stock is quite undervalued and I expect to see a steady rise to at least $50 by year end.

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

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