With the stock market rallying continuing for the fifth year in a row and the major indexes hitting new highs almost daily, you might think that there’s few stocks left that are truly bargains.
Valuations trended higher throughout 2014 even as earnings rose. The S&P 500 is trading with a forward price-to-earnings ratio of 18 which isn’t exactly “cheap.” In fact, many would consider it down right expensive.
But even in a hot market, there are always stocks that are left behind. Some stocks are ignored by investors because there is trouble brewing at that particular company. Other stocks are in an out-of-favor industry or sector.
No matter the reason, a new year is always a good time to poke around in the bargain bin looking for deals. You might have to sort through a bunch of companies that aren’t pretty to find the gems, but they are there.
To find a “stock bargain,” I looked for stocks trading with a forward P/E that’s under the average of the S&P 500, which currently means under 18.
If a stock has a cheap price-to-sales ratio or price-to-book ratio, even better. I consider “cheap” to be a P/S under 1 and a P/B under 3.
I also only looked at Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks. Because, after all, why not buy companies where earnings estimates are rising into 2015? We want to own companies that are growing their earnings.
Here are the three best bargain stocks to buy in 2015:
Republic Airways Holdings Inc. (RJET)
Republic Airways Holdings Inc. (RJET) is an airline that owns Chautauqua Airlines, Republic Airlines and Shuttle America. Most people would know Republic Airways’ partner brands as it operates American Eagle, Delta Connection, United Express and U.S. Airways Express.
RJET flies about 1,300 flights daily to 100 cities in the U.S., Caribbean and Canada.
Airlines are hot and most of them have soared as oil prices have plunged, but it’s not too late to find bargains in the airline industry.
RJET stock is trading near 52-week highs like many of its peers, but, believe it or not, it’s still a bargain. In fact, Republic Airways is dirt cheap compared to the overall market.
Not only is RJET stock’s forward P/E of 9.4 way below the average of the S&P 500, which is 18, it also has an attractive P/S of just 0.5 and a P/B ratio of only 1.1.
Everyone thinks the airlines sector is overheating, but you can still find a good bargain in Republic Airways. Take a look at RJET stock’s numbers below:
- Forward P/E = 9.4
- Price-to-Book = 1.1
- Price-to-Sales = 0.5
- Expected 2014 earnings growth = 16.2%
- Expected 2015 earnings growth = 5%
- Zacks Rank #1 (Strong Buy)
Meritor Inc (MTOR)
Meritor Inc (MTOR) supplies drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets, especially to trucks and trailers. Meritor has been in business making axles and brakes since 1909. Headquartered in Michigan, Meritor now has operations in 18 countries worldwide.
In fiscal 2014, MTOR sales rose 3% to $3.8 billion on higher sales in North America. However, sales in South America and the Defense market were still soft. Meritor is focusing on its three-year turnaround plan, called M2016, which is supposed to grow revenue and margins and reduce debt.
Plus, as the global economy recovers, so will the trucking and transportation industries.
MTOR stock is undervalued compared to the S&P 500. Meritor has a forward P/E of just 10.5, but is also expected to grow earnings this fiscal year by the double digits. What’s not to like about Meritor’s numbers below?
- Forward P/E = 10.5
- Price-to-Sales = 0.4
- Expected F2015 earnings growth = 32.9%
- Zacks Rank #2 (Buy)
Blount International Inc (BLT)
Blount International Inc (BLT) may not be a household name, but BLT products are used in 115 countries. Blount makes replacement parts, equipment and accessories for the forestry, lawn and garden, ranch and agriculture industries as well as the concrete cutting and finishing markets. Blount is the industry leader in making saw chain and guide bars for chain saws.
In the third quarter, BLT stock’s sales rose 6.3% on improving end markets. In early November, Blount saw no slowdown in Europe, which includes Russia, but that was before the ruble went into a free fall.
Still, the analysts haven’t been cutting estimates. Blount is expected to see double-digit earnings growth this year and next.
While not as cheap as Republic or Meritor, Blount trades with a forward P/E of 16.2, which is still under the average of the S&P 500.
Blount also has a P/S of 0.9, which puts BLT stock in the value category. Here’s a round-up of BLT stock’s value:
- Forward P/E = 16.3
- Price-to-Sales = 0.9
- Expected 2014 earnings growth = 44%
- Expected 2015 earnings growth = 15%
- Zacks Rank #1 (Strong Buy)
Dig Deeper for Bargains
With the major indices at all-time highs, it’s going to be tougher to find the high quality bargains.
Look beyond the well-known names, and look in industries that might not seem as glamorous.
Still, don’t rule out the hot sectors. Nothing has been as hot as the airline stocks in the last three months, and I was still able to find a dirt cheap airline stock with rising earnings estimates.
These three stocks are just a start of the bargains I managed to find with a Zacks Rank of #1 or #2. If you dig deeper next year, you’ll be able to find others.
Who doesn’t like a good bargain to start the new year? Happy investing in 2015.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.
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