The past two weeks have been terrible for the S&P 500, which lost 2% in that time. For the year-to-date, the S&P barely sits in positive territory, leading some to believe that maybe the markets aren’t all that expensive.
However, CNBC ran a piece in January in which Jim Paulsen of Wells Capital Management said that today’s markets are the most expensive since World War II. In fact, the median price-to-earnings ratio of the NYSE is currently 20, higher than the P/E for bull markets in 2005, 1998 and 1962.
So which is it? Is the market overbought or undervalued?
The answer may be different for almost every investor. But a safe play regardless is to find value stocks to buy on a pullback.
Goldman Sachs recommends a group of value stocks that provide above-average total cash return to shareholders through buybacks and dividends. Here are three that are worth buying in the event of a 10% to 20% correction in U.S. stocks at some point.
Value Stocks — CIGNA Corporation (NYSE:CI)
CIGNA Corporation (NYSE:CI) stock is up 25.8% year-to-date and reaching new all-time highs. Whether you’re comparing against its industry peers or the entire S&P 500, CI stock has been delivering serious outperformance over the past decade.
Although CI stock’s current P/E ratio is 16.7, considerably higher than its five-year average of 10.6, it’s still valued at 240 basis points less than the index itself.
So why should you buy CIGNA compared to other value stocks?
Its book value per share grew 8.3% in 2014 to $41.55 with consolidated revenues up 8% year-over-year to $34.9 billion and adjusted income from operations of $7.43 per share (an increase of 9.4%). Shareholders benefited from $1.63 billion in CI stock repurchased in the past 12 months and $2.6 billion in the last 24 months — four times the amount of buybacks the previous three years before that.
With the company expected to generate as much as $8.40 per share in adjusted income from operations in 2015 on 8% to 10% revenue growth, it’s no wonder Zacks has a “buy” rating on CI stock and a 12-month price target of $144.
A price correction of 10% or more would make CI a screaming buy.
Value Stocks — Anthem Inc (NYSE:ANTM)
Anthem Inc (NYSE:ANTM) is the second-best-performing stock of the 19 value stocks listed by CNN from the Goldman Sachs top 50, up 24% year-to-date, just a tad less than its CI peer but 22.5 percentage points greater than the S&P 500.
It can’t hold to a candle to CI stock whether we’re talking the one-, three- or five-year performance numbers but it’s still pretty darn good. A $10,000 investment in ANTM stock five years ago would be worth $25,637 today — $6,400 greater than the S&P 500 would have returned.
What does the future look like for ANTM stock? It’s up, up and away, thanks largely to demographics.
Boomers are pushing Anthem, known as WellPoint, to all-time highs; the first baby boomers will be hitting 70 in 2016. With boomers spending more on health care, health care providers like Anthem, with 37 million customers, are the beneficiary of this spending. Since 2010, Anthem’s revenues have increased by 27% to $68.4 billion.
So, even though ANTM stock has gained almost 23% in the last three months alone, a correction of 10% to 20% puts the “buy” signal back on. For the long term, if you’re buying to hold for 3-5 years, the aging boomers should ensure this stock generates significant appreciation in that time.
When it comes to value stocks, ATM stock might not be CI caliber, but it’s pretty darn close.
Value Stocks — Kroger Co (NYSE:KR)
A grocery store chain at No. 3 on a list of potential value stocks? Some would say that’s just nuts, but they’d be working off an old assumption. Kroger Co (NYSE:KR) is a very well-run company that exemplifies what’s right about America. It makes money on volume, not on sky-high margins.
In early March, Kroger reported $1.7 billion in net profits in 2014. 13.8% higher than in 2013. Revenues increased 10% year-over-year in large part due to its acquisition of Harris Teeter, a North Carolina firm with higher margins than the Kroger brand. Full-year identical-store sales, that ever-important metric that retailers hang their livelihoods on increased 5.2% — a healthy number for any type of retail.
KR stock jumped to all-time highs on the news. Since announcing its Q4 earnings on March 5, its stock is up 11%, doubling its year-to-date returns to 21% and easily besting its grocery store peers.
The most amazing statistic about Kroger?
Its identical store sales have grown for 45 straight quarters, a streak that has enabled it to survive in lean times such as 2008 and thrive in all other economic conditions. The nation’s No. 1 supermarket, Kroger continues to take market share from rivals such as Wal-Mart Stores, Inc. (NYSE:WMT) using a combination of good prices, strong customer service and an enjoyable shopping experience.
If I could only own one of these potential value stocks in a big market correction, KR stock would be definitely be my choice as its business and business model are the easiest to understand, but the hardest to replicate.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
