Why Morgans thinks 2 of the ugliest ASX 200 blue-chip dogs of 2018 will make a comeback next year

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Some of the worst performing blue-chip stocks are poised to make a comeback in 2019, according to Morgans.

Today’s surprising bounce in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, which is up 0.3% during lunch time trade despite a more than 1% crash on Wall Street, is adding to confidence that beaten down stocks could find renewed favour with investors.

Morgans picked two controversial ASX blue-chip stocks to back for 2019 following the 10% crash in the ASX 200 since the end of the August reporting season.

Getting a Signal

The first is Telstra Corporation Ltd (ASX: TLS) even as our largest telco continues to struggle to find earnings growth.

Morgans thinks investors should buy this unwanted dog because two major headwinds that have been buffeting the stock will ease in 2019.

The first is the NBN with the federal Labor opposition party considering writing down the value of the national broadband network if they win the next election (which is looking increasingly likely).

“A lowering of the NBN asset value and last mile access costs seems inevitable and could open the door to resolving the NBN’s challenges,” said the broker.

“In our view the most practical way to reduce NBN Co’s operating costs by one-third is to remove the A$1bn per annum they pay to Telstra.”

Telstra could get an equity stake in the NBN in lieu of the annual fee, which is paid by NBN Co so it can use the telco’s ducts for its fibre cables.

The other easing headwind is competition. The merger of TPG Telecom Ltd (ASX: TPM) and Vodafone Australia will take pricing pressure off the sector and I am already noticing that the discounts on pre-paid mobile plans aren’t as good now as they were before the takeover news was announced.

The Telstra share price is up 0.7% to $3.06 in after lunch trade and Morgans has a price target of $3.50 on the stock.

Banking on a Revival

The second blue-chip in the red is Westpac Banking Corp (ASX: WBC). Our big banks have lost favour with the public and investors but Westpac’s depressed share price is proving too hard to resist, in Morgan’s opinion.

The broker doesn’t believe the government (whoever that may be in 2019) will impose onerous new regulations on the sector.

It also doesn’t think customer compensation and penalties will prevent the banks from meeting APRA’s capital requirements for 2020 or lead to a cut in their dividends.

“While the major banks sector does not make for an exciting growth story, it does offer attractive dividend yields which we view as sustainable given comfortable capital positions and an environment of subdued credit growth,” said the broker.

“We also expect the regulatory risk premium for the sector to unwind over the next year, providing support to share prices.”

Morgans thinks Westpac is the most attractive bank stock from a valuation perspective and has a price target of $34.50 on the stock.

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