5 Lagging Blue Chips That Can Lead as Investors Turn Bearish

Investors seeking stocks with upside as the overall market goes bearish should look out for five lagging blue chips that trade at a discount to historical averages, as outlined in a recent Barron’s report. These companies reported higher than expected profits in the third quarter, and offer rich payouts. Eli Lilly & Co. (LLY), Ingredion Inc. (INGR), Kohl's Corp. (KSS), Ralph Lauren Corp. (RL) and UnitedHealth Group Inc. (UNH) make the list of top five dividend-paying stocks to “weather an ugly year-end,” per Barron’s reporter Al Root. 

All five of the stocks are down year-to-date (YTD), leading with Kohl’s lower 19%, Ingredion down 11.9%, Ralph Lauren lower 5.6%, Eli Lilly lower 2.4% and UnitedHealth down 1%. By comparison, the S&P 500 has returned 21.2% in 2019 through Monday close. 

While the last two months of the year are often strong for stocks, professional money managers are currently the most bearish on the market than they’ve been in two decades, per Barron’s Big Money Poll. To hedge against stormy weather, Barron’s recommends loading up on dividend stocks with attractive valuations. 

Ingredion 

Food products provider Ingredion, which lists clients in the food, beverage and pharmaceutical industries, trades for just 11 times estimated 2020 earnings. Barron’s likes the stock’s 3% dividend yield, and foresees solid returns if the company manages to stage a turnaround from a rough 2018.

Last year turned out to be disastrous for Ingredion. Seaport Global analyst Brett Hundley said that “if something could have gone wrong, it went wrong.” While earnings fell 10% in 2019, an expected revival could lead the stock to trade higher relative to per-share profits, according to Barron’s. 

Eli Lilly 

UBS, for one, sees huge potential in Eli Lilly, which has beat estimates for three straight quarters. “Many investors have been concerned that [2020] guidance isn’t achievable but we don’t agree,” wrote analyst Navin Jacob in a recent research note. 

Jacob’s $133 price target for Eli Lilly stock implies a more than 20% upside. The analyst indicates that shares reflect “too much conservatism,” trading at less than 17 times estimated 2020 earnings, an approximate 12% discount to their historical average. Meanwhile, Eli Lilly’s dividend yield is at a healthy 2.3%.

Earlier this month, despite posting better-than-expected results for the third quarter, Eli Lilly saw its stock fall on weaker-than-expected sales of a key drug named Taltz. Bulls saw this as an overreaction, with Cantor Fitzgerald analyst Louise Chen writing, “Don’t hold your nose ‘cause LLY smells like a rose this morning,” per another Barron’s report. In the same quarter, Lilly highlighted its newer products, indicating that its drugs released within the recent five years comprised 44% of total quarterly revenue. 

UnitedHealth

Healthcare provider UnitedHealth has seen its shares beaten down due to political uncertainty. This headwinds has led the stock to trade for lower than 15 times forecasted 2020 earnings, down 10% from its five-year average, per Barron’s. On the growth front, UnitedHealth, the parent of the nation’s largest health insurer, has seen earnings rise by more than 15% annually over the past few years.  

Mizuho analyst Ann Hynes expects UnitedHealth stock to jump more than 9% over the 12 next months to reach $270 per share. Hynes attributes the upbeat outlook to the company’s diversified business and clear path to growing profits. 

In the third quarter, UnitedHealth lifted profit guidance for the full year, and attributed better-than-expected results to strong revenue growth from its health services and insurance units. 

What’s Next? 

As investors shift away from momentum and growth stocks, towards more defensive corners of the market and value stocks, the Barron’s lists of dividend payers could outperform. That said, a shift away from this strategy or any sector-specific developments and headwinds could hurt the group.