3 cheap blue-chips for the year ahead

These 3 stocks have underperformed the ASX in 2014, but could be winning investments in the future: Rio Tinto Limited (ASX:RIO), Woolworths Limited (ASX:WOW) and Origin Energy Ltd (ASX:ORG).

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The 'Dogs of the Dow' was an investment strategy set up many years ago, whereby investors would buy certain stocks based on their assessed potential as strong turnaround stories in the following year.

The results were very mixed but, as all value investors will tell you, there is a lot of merit in buying shares when they are cheap.

With that in mind, here are three high quality stocks that have underperformed the ASX during the course of 2014. As such, they seem to offer top notch value for money.

Rio Tinto Limited

With shares in Rio Tinto Limited (ASX: RIO) falling by 11% during the course of 2014, they are massively behind the ASX's 3.5% rise. Clearly, the falling iron ore price has hit Rio Tinto (which depends for 90% of its profit on iron ore) very hard.

However, it could prove to be an excellent turnaround story. That's because it appeals as a value, as well as income play. For instance, shares in the company trade on a P/E ratio of just 10.6, which is considerably lower than the ASX's P/E ratio of 15.4. Furthermore, with a fully franked yield of 3.7% (which is covered 2.3 times by profit), Rio Tinto is a top income play too.

While the price of iron ore could remain weak during the short run, Rio Tinto seems to have huge upward re-rating potential, and with an enticing yield it should appeal to income and value investors alike.

Woolworths Limited

As with Rio Tinto, Woolworths Limited (ASX: WOW) has disappointed in 2014, with shares in the retailer gaining just 2%. Part of the reason for this has been a slight decline in sentiment following first quarter sales growth of just 3%.

This, though, could prove to be a temporary blip, since Woolworths has a fantastic track record of growth. For example, its top line has grown at an annualised rate of 5.4% over the last 10 years, while cash flow has improved by 10.1% per annum over the same time period.

While Woolworths trades on a rich P/E of 17.2, it seems to be worthy of such a high rating. Not only does it have a great track record, it also has a fully franked yield of 4.1%, while a price to sales ratio of 0.7 indicates that good value may still be on offer. As a result, it could see its share price performance turn around over the medium to long term.

Origin Energy Ltd

Surprisingly, Origin Energy Ltd (ASX: ORG) has seen its share price perform better than that of Rio Tinto or Woolworths during 2014. It is only slightly behind the ASX's 3.5% gain at 3% year-to-date, with sentiment being buoyant in anticipation of its Australia-Pacific LNG project coming onstream in mid-2015.

This expectation seems to have offset (to an extent) the lower oil price and uncertainty surrounding the future pricing of the commodity. Still, Origin is expected to deliver exceptional growth over the next couple years, with earnings set to grow at an annualised rate of 33% over the next two years.

Certainly, there may be setbacks regarding the new LNG project, with budget overruns being mooted. However, with a PEG ratio of just 0.66, such challenges appear to be more than priced in to Origin's current share price.

Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.

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