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Are There Bargains Left in Blue Chip Stocks?

September 04, 2009 – by Richard Band

With the S&P 500 up nearly 50% since March, many on Wall Street are wondering how much good is left in this good market run. Is it real bull market? Do growth stocks still have room to grow?

The short answer is we don’t yet know whether this is just a cyclical rise or a real bull market, but for investors, it doesn’t matter. I’m still buying stocks. I’m just getting fussier about the prices I’m willing to pay for them. I want to own companies that don’t already have all of their appreciation potential built into the price.

That eliminates 90% of the large cap stocks out there. But I have identified three blue chip stocks that are still at bargain prices.

Bargain Blue Chip Stock #1 – Lockheed Martin (LMT)

Wall Street is wringing its hands because the Obama Administration is pressuring congress to drop funding for additional F-22 warplanes from the 2010 defense budget. What the crowd overlooks, however, is that Lockheed Martin (LMT) is the prime contractor for the far more versatile F-35, which will bring in billions for the company over the next decade.

At barely ten times this year’s projected earnings (and a single-digit P/E on next year’s net), LMT is trading more than a third below its norm for the past five years. That’s way too cheap for an outfit with steady, government-fueled sales growth and a pristine balance sheet. Furthermore, LMT’s dividend yields a generous 3%.

Buy LMT at $80 or less.

Bargain Blue Chip Stock #2 – McDonald’s (MCD)

Few large businesses have done as fine a job as Mickey D’s of adapting to the current economic environment. With consumers in a stingy mood, McDonald’s (MCD) has sharpened its value proposition with the Dollar Menu, the Angus Burger (higher-quality and more meat for a modestly higher price) and, of course, the resoundingly successful McCafe offerings.

Result: MCD is cruising for record profits in 2009, with another 8% to 10% gain likely next year. Yet the stock is quoted within a hair’s breadth of its lowest P/E (based on forward earnings estimates) of the past five years.

Mickey D’s also throws off a handsome 3.6% yield — juicy red meat for retirees and income-seekers. I’ve steadily added to my position in recent weeks, elevating MCD to the seat of honor as the largest holding in my personal portfolio.

Buy MCD at $59 or less.

Bargain Blue Chip Stock #3 – Wal-Mart (WMT)

Snoots may wrinkle their noses, but it’s hard to argue with Wally’s results. In recession-wracked 2008, the world’s largest retailer posted record profits — and, with the economy turning, another new high is virtually in the bag for this year.

Like McDonald’s and Lockheed, Wal-Mart (WMT) boasts fortress-like finances. Incredibly, though, shortsighted investors in recent months have passed over Wally in favor of tottering retailers that may not survive until next Christmas, let alone the next 10 years.

In fact, WMT is now trading within 5% of its lowest P/E ever as a public company. Gobble up this stock, and you’ll get a better bargain than you’ll even find on Wal-Mart’s shelves.

My target price: Buy WMT at $54 or less.