When investors hear the term “cheap stocks,” most instantly think of stocks that are selling for a low nominal dollar amount, such as $5 or $10 per share. But another type of cheap stock is one that’s simply unappreciated by Wall Street and trading for a low valuation.
Currently the S&P 500 has a P/E ratio of 19.5, while the historical mean is 15.5. Furthermore, the Shiller P/E ratio for the S&P 500, which is based on average inflation-adjusted earnings from the previous 10 years, is at 27.9 with a historical mean of 16.6.
But while it might be more difficult to find cheap stocks when the market as a whole is highly valued, it’s not impossible. Today, we’ll look at four companies that are cheap based on valuations, and are just generally quality stocks to hold.
4 Cheap Stocks to Buy Now: Apple Inc. (AAPL)
Trailing 12-Month P/E: 17.5
Forward P/E: 14.1
Despite the size of Apple Inc. (NASDAQ:AAPL) and its nominal share price of $129, when we consider the growth rates Apple continues to produce and is expected to produce in the future, the stock seems cheap rather than expensive.
In 2015, Wall Street expects Apple to post earnings per share of $8.58 for the full year. That would be a 33% increase from what the company posted in 2014, a year in which EPS grew 13% from the previous fiscal year.
Furthermore, over the past four quarters Apple has increased EPS by 15%, 19%, 20% and a crushing 47% in the most recently reported quarter.
While some investors fear that Apple can’t sustain this growth for much longer, I simply don’t see it that way. Apple has not only developed great world changing products, but the company has craftily locked customers into its ecosystem in a way that makes switching from Apple to another brand nearly unthinkable.
Furthermore, each and every year Apple releases a new product or service that strengthens that bond the customer has with the company — iTunes, the iCloud and the latest, Apple Pay.
Apple is here to stay and shares will only get more expensive as time goes on. In a few years from now, $132 per share will seem crazy cheap, if it doesn’t already.
4 Cheap Stocks to Buy Now: Deere & Company (DE)
Despite trading at $91 per share, Deere & Company (NYSE:DE) is a cheap stock when we consider the company made $8.63 per share over the past 12 trailing months.
Moving forward, management has publicly stated that sales and profits from its farm equipment business will be lower in the coming year, causing the company to lay off more than 900 workers. This announcement has caused analysts to reduce earnings estimates for 2015 and therefore increasing Deere’s forward P/E.
However, when we consider the long-term business prospects, DE is an extremely cheap stock. The company is arguably best in class in terms of farming equipment — and considering the farming industry is essentially required for human life to exist, investing in Deere today seems like a no-brainer.
Not yet convinced you should own Deere? How about a 2.7% yield and knowing that you will be purchasing shares right along with Warren Buffet, who only buys stocks he considers to be undervalued. Buffett’s Berkshire Hathaway Inc (NYSE:BRK.A, NYSE:BRK.B) recently disclosed a 5% stake in Deere.
4 Cheap Stocks to Buy Now: JPMorgan Chase & Co. (JPM)
More so than any other industry, the financial industry was hurt during the great recession. The memories of failing banks and government bailouts are still fresh in a number of investors’ minds.
Furthermore, due to the financial crisis in 2007-2008, banks have been under pressure to increase capital reserves and in most cases, pay hefty fines for poor business practices that helped contribute to the crisis. Adding money to capital reserves and paying fines has meant fewer profits for the banks.
Lower profits for JPMorgan Chase & Co. (NYSE:JPM) have hurt investors’ opinions of the bank, but that is soon going to change. First, the bank plans to cut costs through staff reductions and by reducing its customer’s deposits. These moves should free up capital, which can be used to increase JPM profits over the next few years.
In addition, rising interest rates, which are likely to happen sooner rather than later, will also certainly help JPMorgan increase its profits. When interest rates move higher, banks can increase the spread between what they borrow money for and what they lend it back out at. That difference, which gets larger the higher rates move, goes to the bottom line.
It is difficult to say exactly when JPMorgan will start showing EPS growth again, but its undeniable that it will happen within the next few years.
4 Cheap Stocks to Buy Now: Travelers Companies Inc (TRV)
Similar to the banking industry, insurance companies also benefit from rising interest rates. The insurer takes premiums and often invests that money in safe, interest-paying investments that backup the policies they write.
When interest rates are low, investment returns are low; leaving little money left over after paying out policy claims. But when rates are high, insurance companies can often invest premiums and not only have enough money to pay out policies, but produce sizable profits.
Travelers Companies Inc (NYSE:TRV) has proven that it can withstand a low interest rate environment; the company has been able to grow EPS in 2013 by 52% and last year by 11.5%. When the Federal Reserve finally allows interest rates to begin climbing higher, TRV stock will certainly benefit, making the $107 per share you pay today seem like a very cheap stock price.
The currently low P/E ratio is likely due to the uncertainty about when rates will rise. Investors will likely begin to pour into the stock at the first sign of higher rates, so while you wait for that to happen, Travelers’ 2% dividend yield will hold you over.
Remember, it’s better to be a little early for the party than to miss it completely.
As of this writing, Matt Thalman owned shares of AAPL and JPM.