The U.S. economy has been exhibiting a solid recovery this year, as evidenced by its 6.4% annual GDP growth in the first quarter. Among other favorable economic data, consumer spending is steadily returning to pre-pandemic levels thanks to governmental rescue packages and steady job growth. However, rising purchasing power is creating inflationary pressure in the economy and, thus, introducing volatility to the markets.
In these circumstances, we think blue chip stocks are the best picks. Blue chip stocks represent large, well-known companies that are known for their financial resiliency and balance sheet strength. While blue chip stocks are not immune to market downturns, they are the favorites of low-risk investors because they have a history of delivering steady returns over the long-term and offer protection during short-term market fluctuations.
Given this backdrop, we think it is wise for investors to scoop up fundamentally-sound blue chip stocks McDonald’s Corporation (MCD), Starbucks Corporation (SBUX), 3M Company (MMM), and Altria Group, Inc. (MO). They have shown decent strength over last year and are well-positioned to offer attractive returns this year.
McDonald’s Corporation (MCD)
MCD is one of the world’s leading global foodservice retailers with more than 39,000 locations in more than 100 countries. Its restaurants offer various food products and beverages, as well as a breakfast menu. Approximately 93% of MCD’s restaurants are franchised and operated by independent local business owners. The company functions through three segments–U.S., International Operated Markets, and International Developmental Licensed Markets & Corporate.
Because consumer demand for fast-food and foot traffic at quick service restaurants (QSRs) are returning steadily to pre-pandemic levels, MCD is on a hiring spree and wants to hire 10,000 more hourly employees over the next three months. Furthermore, workers at MCD’s company-owned 660 U.S. locations will also see pay raises that average 10% over the next several months. MCD is also on track with its new growth strategy, Accelerating the Arches, which it unveiled last December. The strategy encompasses all aspects of the company’s business as the leading global omni-channel restaurant brand.
In the first quarter, ended March 31, 2021, MCD’s revenue increased 9% year-over-year to $5.12 billion. Its global comparable store sales increased 7.5% during the quarter due to a strong recovery in the international operated markets. Moreover, its revenue improved month-to-month throughout the quarter. Its comparable sales results in the U.S. benefited from 13.6% average check growth, versus the year-ago 0.1% rise. Its adjusted EPS came in at $1.92, rising 31% compared to the prior year value of $1.47.
MCD’s dominance in the global food-service industry and large scale of operations helped it rise sharply with the recovery in the quick service restaurant (QSR) market. In fact, the chain managed to stay afloat amid the pandemic by rapidly integrating digital sales, delivery services and takeaways. MCD is further benefiting from its expansion efforts, comps growth and menu innovation.
Despite the pandemic, MCD opened about 500 restaurants in 2020, and the chain is planning to open more than 1,300 restaurants globally this year. Notably, MCD has already opened 150 new restaurants in China during the first quarter and is on track to open 500 restaurants in the country this year. The stock has returned nearly 30% over the past year and may gain further momentum. Analysts expect MCD’s current year revenue and EPS to improve 16.6% and 42.3%, respectively.
MCD’s POWR Ratings are consistent with this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
MCD has an A grade for Quality, and a B grade for both Growth and Stability. The stock is currently ranked #5 in the 47-stock, A-rated Restaurants industry.
In total, we rate MCD on eight different levels. Beyond what we stated above, we have also given MCD grades for Value, Momentum and Sentiment. Get all MCD’s ratings here.
Starbucks Corporation (SBUX)
With nearly 33,000 stores around the globe, SBUX is the premier roaster, marketer, and retailer of specialty coffee, tea and other beverages, and fresh food items worldwide. SBUX has rapidly grown into the world’s dominant coffee shop-themed chain over five decades in 83 markets. It operates through three main business segments: Americas, International, Channel Development, and Corporate and Others.
On May 13, Generate, a leading provider of sustainable infrastructure, announced the establishment of the first six of up to 23 New York State community solar projects under an innovative multi-year facility with Starbucks Coffee Company. The projects are expected to supply more than 119,885 MWhs annually of clean energy to Starbucks New York stores and the surrounding community.
In its fiscal second quarter (ended March 28, 2021), SBUX’s top-line surged 11% year-over-year to $6.7 billion, driven mainly by 15% growth in comparable store sales. Its Americas segment demonstrated excellent recovery. Domestic comparable store sales increased 9% after remaining weak in the trailing three quarters. The company opened five net new stores during the quarter, translating to a 3% year-over-year unit growth. While global transactions were down 4% year-over-year, its average ticket sizes climbed an impressive 19% during the quarter. Its adjusted EPS came in at $0.62, soaring 93.8% compared to the $0.32 year-ago value.
The stock has returned 30.3% over the past year. SBUX is accelerating moves to make on-the-go orders even more convenient, while focusing on international expansion. The company has the potential to grow based on its continued focus on digital ordering and wellness-centered menu innovation. Notably, its management raised its full-year guidance for its fiscal year 2021, indicating confidence in a continued recovery. The Street expects the company’s current year revenue and EPS to improve 22.4% and 115.6%, respectively.
It’s no surprise that SBUX has an overall A rating, which translates to Strong Buy in our POWR Ratings system. SBUX has an A grade for Growth, and B for both Sentiment and Quality. It is ranked #4 in the Restaurants industry.
In addition to the POWR Ratings grades we’ve just highlighted, one can see the SBUX ratings for Value, Momentum and Stability here.
3M Company (MMM)
MMM develops and manufactures various products worldwide related to electronics, telecommunications, industrial, consumer and office, health care, safety, and other markets. The company also has a strategic collaboration with Merry Maids in the residential cleaning sector. MMM operates through four business segments–Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.
In February, MMM collaborated with Palantir Technologies (PLTR) in a multi-million-dollar expansion deal. The agreement is aimed at expanding the company’s use of PLTR’s foundry platform in the ongoing digital transformation to build a dynamic supply chain and be able to respond nimbly to changes in demand across tens of thousands of products. MMM also teamed with Pegatron in February to develop a new Virtual Reality reference design headset with a folded optics lens.
MMM’s sales have increased 5.8% year-over-year to $8.58 billion in the first quarter of 2021. This was driven primarily by strong end-market demand for personal safety, home improvement, general cleaning, semiconductor, data center and biopharma filtration products. In fact, MMM witnessed robust organic growth of 8% across all its business groups and geographic areas after posting tepid numbers in recent years. Its safety and Industrial sector led the way, with 10.3% organic growth as personal safety, roofing granules and automotive products witnessed solid demand. Its adjusted EPS came in at $2.77, rising 27% year-over-year.
MMM has surged 36% over the past year but is still a relatively cheap option to bet on its advancing operating model, streamlining business operations, and focus on global trends. The company is strategically investing in research and development and innovating fast to improve its supply chain system. Notably, management expects 3% to 6% organic annual growth for the full-year 2021. And analysts expect the company’s current year revenue and EPS to improve 8.3% and 12.3%, respectively.
MMM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. MMM has an A grade for Quality, and B for Stability. It is ranked #53 in the 86-stock A-rated Industrial – Machinery industry.
Click here to see the additional POWR Ratings for MMM (Growth, Value, Momentum and Sentiment).
Click here to check out our Industrial Sector Report for 2021
Altria Group, Inc. (MO)
MO manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. It offers cigarettes primarily under the Marlboro brand and cigars principally under the Black & Mild brand. It operates through three segments – Smokable products, Oral tobacco products and Wine.
The United States has been witnessing declining smoking rates over the past decade. Adding to the trend, the Food and Drug Administration (FDA) agreed to a petition last month that could lead to a ban on menthol cigarettes and flavored cigars by next year. Hence, amid declining cigarette sales volumes, MO is capitalizing on the rising demand of low-risk tobacco alternatives. Notably, the company has been gaining from growth in its oral tobacco category and other next-generation reduced risk products (RRPs).
MO’s net revenue decreased 5.1% year-over-year to $6 billion in the first quarter (ended March 31, 2021), driven primarily by lower net revenues in the smokable products segment. However, MO’s non-combustible product portfolio and oral tobacco offerings had a potentially beneficial development during the quarter. The company, through its subsidiary Helix Innovations, took full ownership of on!–a popular tobacco-derived nicotine (TDN) pouch product. Notably, the company expanded the distribution of on! by an additional 15,000 stores and made it available in approximately 93,000 stores at the end of the quarter. MO’s adjusted EPS came in at $1.07, falling 1.8% year-over-year.
In March, MO, through its subsidiary Philip Morris USA, also introduced new IQOS 3 tobacco heating system devices and has been expanding its Marlboro HeatSticks in retail stores in some states. Management plans to expand IQOS and Marlboro HeatSticks into three additional metro markets in 2021 and expects Marlboro HeatSticks to be sold in geographies covering approximately 25% of U.S. cigarette industry volume by the end of 2021.
In addition, with the growing expectations regarding the legalization of cannabis, the company is making proactive efforts to expand into that industry. It recently acquired stakes in the Canada-based cannabis company Cronos Group. The stock has returned 22% so far this year but could generate better returns. Analysts estimate MO’s revenue and EPS for the current year to grow 1.9% and 5.5%, respectively.
According to our POWR Ratings system, MO has an A grade for Quality, and a B grade for Momentum. It is ranked #7 in the 11-stock, A-rated Tobacco industry.
In addition to the POWR Ratings grades we’ve just highlighted, one can see MO’s ratings for Growth, Value, Stability and Sentiment here.
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MCD shares were trading at $229.82 per share on Wednesday afternoon, down $2.11 (-0.91%). Year-to-date, MCD has gained 7.76%, versus a 9.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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