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3 Blue Chip Stocks to Buy Heading into 2021

Benjamin Rains
·7-min read

November has been a big month for the market, with the Dow, the S&P 500, and the Nasdaq all hitting new records. In fact, the blue-chip index broke 30,000 for the first time ever on Tuesday and the S&P 500 is now up over 11% this month.

Tuesday’s broad-based climb followed what Wall Street viewed as positive news on the transition of power front in Washington, which was only the latest in a slew of market catalysts. The month began with investors diving into stocks when it seemed pretty clear that there will be divided government in Washington.

Then, vaccine announcements from Pfizer and others shot another jolt of optimism into the market. This news saw Goldman Sachs and other influential names on Wall Street lift their 2021 outlooks. The possibility of a vaccine appears to be even more important as renewed lockdown measures are introduced in parts of the U.S. and Europe, which is set to impact the already-decimated hospitality industry and the wider travel and leisure market.

Despite the devastation in many industries and businesses, the larger S&P 500 earnings picture continues to improve. This is helped along by the fact that big tech stocks and the major retailers are thriving during the social distancing environment. And helping prop up this comeback is our ultra-low interest rate environment that isn’t going away anytime soon.

Therefore, investors might want to add stocks as we get closer and closer to 2021. And why not start with some large-cap names that provide exposure to growth industries, pay a dividend, and don’t need a vaccine to help them.

Target TGT

Target wowed Wall Street once again on November 18 as it shines bright during the Amazon AMZN era. The retailer’s Q3 sales surged 21%—its second-straight quarter of over 20% revenue growth, with its in-store comps up 10% and digital comps up a whopping 155%. Consumers have clearly taken to its various same-day offerings. TGT also crushed our EPS estimate by 73% and its margin expanded as well—TGT continues to outshine Walmart WMT in this category.

The Minneapolis-based retailer has attracted customers through trendy and affordable furniture, home décor, fashion, food, and more. TGT has also grabbed partnerships with brands that were once major staples at department stores, as they continue to fade. The mix of a strong in-store and foot traffic-heavy model alongside an expanding digital business will serve Target well, as e-commerce still accounts for less than 20% of total U.S. retail sales.

Zacks estimates call for Target’s fourth quarter revenue to jump over 12% to help lift its adjusted earnings by 22%. TGT’s longer-term earnings outlook has also soared since its Q3 release to help it land a Zacks Rank #2 (Buy). The stock rocks an overall “A” VGM score and its 1.5% dividend yield tops Walmart and matches the S&P 500.

Target stock has climbed over 40% in 2020 to double its industry and it’s outpaced Amazon over the past two years, up 160% vs. 100%. Target stock hit a brand new high on Wednesday, yet its valuation picture has improved from earlier in the year and it consistently trades at a discount to its peer group that includes Costco COST, Dollar General DG, and others.  

Microsoft MSFT

Microsoft shares are neck-and-neck with Amazon over the last several years as both giants grow their influence in the booming cloud computing market. MSFT topped our estimates last quarter, with earnings up 32% and sales up 12%. The growth was once again driven by its Intelligent Cloud unit, which jumped 20% to $13 billion. The space was the biggest top-line contributor of its three core areas. Microsoft’s cloud efforts now play a role in nearly every facet of its business. This includes MSFT’s Office offerings, which remain invaluable to countless businesses, organizations and schools.

Meanwhile, the company is set to grow within the massive global gaming market, and its Xbox content and services revenue surged 30% last quarter. On top of that, its portfolio of remote work offerings compete against Zoom Video ZM and others. And its impressive cash pile—it last held $137 billion in cash and equivalents—will help it continue to make strategic acquisitions, both big and small.

Zacks estimates project that Microsoft’s revenue will climb by 10% in both fiscal 2021 (current year) and FY22. The firm’s projected top-line growth would follow three straight years of between 13% to 15% revenue expansion, which is highly impressive for a firm of its size and age. Meanwhile, its adjusted earnings are expected to climb 17% and 9%, respectively over this stretch.

MSFT’s positive longer-term EPS estimate revisions help it grab a Zacks Rank #2 (Buy) right now. Microsoft stock has climbed 40% in the last 12 months and it rests about 5% off its 52-week highs. This run has helped push its market cap up to around $1.6 trillion. And its 1.1% dividend yield beats the 10-year U.S. Treasury and Apple’s AAPL 0.70%.

Taiwan Semiconductor Manufacturing Company (TSM)

Taiwan Semiconductor is likely the least well-known of these three stocks, but it might not stay that way with investors for much longer. TSM is the world’s largest semiconductor manufacturer, with roughly 55% market share. TSMC runs a dedicated semiconductor foundry business and it claims to have the “world's largest semiconductor design ecosystem” that has enabled “85% of worldwide semiconductor start-up product prototypes.”

Companies turn to foundries such as TSMC for their integrated circuit production because the costs and time involved are enormous, which makes building chips in-house far less attractive, if not impossible for many. This has helped Taiwan Semiconductor land deals giants like Nvidia NVDA and it’s even helping produce Apple’s new in-house processors.

TSMC’s revenue has surged by 29% or higher in the trailing four periods, including in the third quarter. And the company stands to benefit from the continued expansion of the chip space, and it’s ready to capitalize on the shift to 5G and more. Zacks estimates call for its full-year sales to surge 38% to help lift its adjusted earnings by 62%.

TSMC earns a Zacks Rank #2 (Buy) right now and it’s part of a space that rests in the top 4% of over 250 Zacks industries. TSMC shares have jumped 80% over the past year to easily top the broader tech industry’s 35% climb. TSM stock sits not too far below its recent records and its 1.40% dividend yield blows away many other growth-focused tech names.

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Microsoft Corporation (MSFT) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report, Inc. (AMZN) : Free Stock Analysis Report
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Walmart Inc. (WMT) : Free Stock Analysis Report
Dollar General Corporation (DG) : Free Stock Analysis Report
Costco Wholesale Corporation (COST) : Free Stock Analysis Report
Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report
Zoom Video Communications, Inc. (ZM) : Free Stock Analysis Report
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