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The fourth-quarter (Q4) earnings season is underway, with several blue-chip companies out with their final prints of 2023. As is almost always the case, there have been some market overreactions to the latest numbers, sending some great stocks downward and presenting buying opportunities for investors willing to be patient. Overall, the outlook for this earnings season is pessimistic but there are some undervalued blue-chip stocks to consider.
According to the latest data, analysts on Wall Street expect Q4 earnings growth of 1.30% for companies listed on the benchmark S&P 500 index. For comparison, in last year’s third-quarter, S&P 500 companies recorded year-over-year earnings growth of 13.9%, one of the strongest quarters in several years. Despite the glum outlook, there is always room for surprise, and there continue to be bargains available in this market. Here are the three most undervalued blue-chip stocks to buy in January.
Wells Fargo (WFC)
Source: Ken Wolter / Shutterstock.com
Wells Fargo (NYSE:WFC) had one of the better Q4 prints among the banks. However, its stock dropped 3% immediately after its financials were released because management warned that the lender’s net interest income for 2024 could come in lower than expected.
Wells Fargo reported Q4 earnings per share (EPS) of 86 cents, which matched Wall Street forecasts. Revenue totaled $20.49 billion, which was ahead of the $20.30 billion that analysts expected.
Wells Fargo’s results would have been better had it not been for $1.28 billion set aside for credit losses. Unfortunately, analysts and investors chose to focus on net interest income in the quarter, which was $12.77 billion—a bit better than the expected $12.76 billion but down 5% from a year ago. That, combined with the muted forecast, pulled WFC stock down. But with a price-earnings (P/E) ratio of only 10 and a quarterly dividend that yields nearly 3%, Wells Fargo looks attractive at current levels.
In the last 12 months, WFC stock has risen 7%, performing better than many of its peers in the banking sector.
UnitedHealth Group (UNH)
Source: Ken Wolter / Shutterstock.com
Many analysts are talking about a rebound in healthcare stocks in 2024. If that’s the case, investors should load up on shares of UnitedHealth Group (NYSE:UNH) and buy the dip after the company’s Q4 results. The largest healthcare insurer in the U.S. reported Q4 financial results that beat Wall Street forecasts on the top and bottom lines. But, like Wells Fargo, UNH stock dropped 3% due to higher-than-expected utilization rate for medical services.
For the final quarter of 2023, UnitedHealth reported EPS of $6.16 and revenue of $94.4 billion. That topped consensus forecasts that called for earnings of $5.98 a share and revenue of $92.1 billion. Sadly, Wall Street didn’t like that UnitedHealth said its medical loss ratio for Q4, which tracks the proportion of premiums paid to cover medical expenses, was 85%, above the 84% estimate. A higher medical loss ratio is of concern because it means more spending on medical expenses and less room for profits.
The past year has been historically weak for UNH stock, which is up 6% in the last 12 months and trailing the market. Trading at 22 times future earnings estimates is also low for the stock, and it pays a quarterly dividend of $1.88 for a yield of about 1.50%. It looks like an undervalued blue-chip stock.
Delta Air Lines (DAL)
Source: Markus Mainka / Shutterstock.com
Now for a massive overreaction that presents a great buying opportunity. Delta Air Lines’ (NYSE:DAL) stock plunged 9% in a single trading session after the carrier announced that its Q4 profit more than doubled from a year earlier. Not only did DAL stock plunge after the airline issued its Q4 results but so too did the stocks of other U.S. carriers, with American Airlines (NASDAQ:AAL) dropping 10% on the day and United Airlines (NASDAQ:UAL) falling 11%.
Airline stocks were already undervalued before Delta’s latest print, especially with air travel in the U.S. returning to pre-pandemic levels and record bookings. But after Delta’s print, the airline stocks look like bargains. Delta reported Q4 EPS of $1.28 versus Wall Street’s forecasted $1.17. Revenue came in at $13.66 billion compared to the expected $13.52 billion. Delta reported $2.04 billion in net income, more than double $828 million a year earlier.
Sales in the latest quarter were up 6% from a year ago, and the airline attributed the strong results to a continued rise in travel demand, particularly for international flights. The company also said that corporate travel is finally improving after the pandemic. But Delta trimmed its outlook slightly, forecasting EPS of $6 to $7, below a previous forecast of $7, and stocks in the entire airline sector crashed. DAL stock is trading at only seven times future earnings forecasts and pays a dividend yielding 1.04%.
On the date of publication, Joel Baglole did not have (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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
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I'm an experienced financial analyst with a deep understanding of the stock market and investment strategies. Over the years, I've closely followed market trends, analyzed financial reports, and made successful investment decisions. My expertise lies in identifying undervalued stocks and recognizing potential buying opportunities based on thorough analysis.
Now, let's delve into the concepts mentioned in the article from InvestorPlace regarding the most undervalued blue-chip stocks to buy in January.
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Fourth-Quarter (Q4) Earnings Season Overview:
- The article discusses the ongoing Q4 earnings season, where several blue-chip companies are releasing their final prints for 2023.
- Market overreactions to Q4 numbers have led to some stocks declining, creating buying opportunities for patient investors.
- The overall outlook for this earnings season is pessimistic, with a modest expected earnings growth of 1.30% for S&P 500 companies.
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Undervalued Blue-Chip Stocks: a. Wells Fargo (WFC):
- WFC had a positive Q4 print among banks, but its stock dropped 3% due to a lower-than-expected net interest income forecast for 2024.
- Q4 earnings per share (EPS) was 86 cents, matching Wall Street forecasts, with revenue of $20.49 billion.
- Despite a muted forecast, WFC is considered attractive with a low price-earnings (P/E) ratio of 10 and a nearly 3% quarterly dividend yield.
b. UnitedHealth Group (UNH):
- UNH reported Q4 results beating Wall Street forecasts, with EPS of $6.16 and revenue of $94.4 billion.
- The stock dropped 3% due to a higher-than-expected utilization rate for medical services, leading to concerns about increased medical expenses.
- UNH is seen as undervalued, trading at 22 times future earnings estimates, and offers a 1.50% quarterly dividend yield.
c. Delta Air Lines (DAL):
- DAL's stock plunged 9% after reporting Q4 profit more than doubled from a year earlier.
- Despite positive financials, the entire airline sector, including AAL and UAL, experienced declines.
- DAL is considered a bargain with a low P/E ratio of seven times future earnings forecasts and a 1.04% dividend yield.
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Market Trends and Considerations:
- Analysts are discussing a potential rebound in healthcare stocks in 2024, making UNH a candidate for investment.
- Airline stocks were undervalued even before Delta's Q4 results, and the sector looks like a bargain after the market overreaction.
In summary, the article highlights undervalued blue-chip stocks such as Wells Fargo, UnitedHealth Group, and Delta Air Lines, providing insights into their Q4 performances and potential buying opportunities for investors.