The broader market has put up an amazing gain of nearly 11% since the late September low, making it seemingly harder to find stocks to buy low. Indeed, technical analysis says the S&P 500 has entered “overbought” territory.
According to the chart watchers, that’s a condition that sets the market up for a pullback.
Happily, that doesn’t mean investors can’t find bargain stocks to buy before the end of the year. Sure, the market might be oversold, but it’s up a measly 1% for the year-to-date.
At the same time, more than half of the S&P 500’s gains this year have been driven by just a small handful of stocks such as Google (GOOGL), Amazon (AMZN), Netflix (NFLX) and Facebook (FB).
If you stand back from those standouts, it’s possible to find any number of
To suss out stocks that are on sale, we screened the S&P 500 for cheap stocks with solid fundamentals that should outperform the broader market through year-end and beyond. Here are those stocks to buy:
Cheap Stocks to Buy: Apple Inc. (AAPL)
Of course. Apple (AAPL) is up less than 5% for the year-to-date and sentiment isn’t exactly spectacular. Just look at the valuation. Apple trades at less than 11 times forward earnings.
Let that sink in. Investors are paying less for Apple’s future earnings than they are for poky consumer discretionary stocks like Procter & Gamble (PG).
At the same time, on a forward earnings basis, Apple trades at a 40% discount to the broader market, yet it has superior growth prospects than the S&P 500.
Investors fret that Apple has simply become too big to generate material growth off a large base. It’s also dependent on iPhone sales, as iPad interest is waning and the Apple Watch has failed to become a huge hit.
Those are legitimate concerns, but the market is giving them too much weight. Sure, the iPhone makes Apple something of a one-trick pony, but it’s a hell of a trick.
Cheap Stocks to Buy: AutoNation, Inc. (AN)
As a car retailer, AutoNation (AN) should be riding high. Demand for new vehicles is booming. AN is up a market-beating 5.3% for the year-to-date, but that really should be more.
One concern is increased competition. AN is the largest vehicle retailer, and that puts a target on its back. Just see O’Reilly Automotive (ORLY).
But AutoNation’s business is healthy, and it’s expected to put up an annual compound growth rate of more than 15%. It’s usual for a stock to trade with a forward price-to-earnings multiple of 20 or more for that kind of growth, let alone the 13 that AN trades for. That’s a steep discount to its own five-year averages on both forward and trailing earnings bases.
Lastly, the price/earnings-to-growth ratio is less than 1. The market is more than double that figure. (PEG measures how fast a stock is rising relative to its growth prospects.)
Cheap Stocks to Buy: Boeing Co (BA)
Boeing (BA) is another stock trading at a discount to the S&P 500 despite having better growth prospects. It also trades below its own five-year average forward and trailing P/Es. And PEG is far below the broader market’s.
At the same time, Boeing is rocking it on a fundamental basis. For the most recent quarter, the blue-chip aerospace company delivered a beat-and-raise quarter and a flood of free cash flow.
BA delivered 199 commercial aircraft worth nearly $17.7 billion, up from 186 and $16.1 billion a year ago. Just as important, the pipeline remains full. Boeing received 166 net orders in the third quarter, bringing the total backlog to 5,700 planes.
Fears of an aircraft bubble seem overblown. After all, orders remain strong even even amid low fuel prices.
BA is up a welcome 12% YTD and looks poised for more market outperformance ahead.
Cheap Stocks to Buy: Carnival Corp (CCL)
Carnival Corp (CCL) might not be a screaming bargain by some measures, but it certainly appears to be on sale.
Bookings continue to rise, helped by strength in an improving U.S. economy. Lower prices are a net positive, and the cruise ship operator is doubling its presence in China.
True, China’s economy is slowing, but the long-term trend is one of much higher growth than any developed market you can name.
CCL hit levels last seen 10 years ago after a beat-and-raise quarter — the stock is up 17% YTD — but there’s still value to be had. Carnival currently trades at 16 forward earnings — essentially in line with its five-year average — so it’s not expensive.
Likewise, CCL fetches only at a slight discount to the broader market’s forward P/E. That said, Carnival sports a projected annual long-term growth rate of 21%. The S&P 500 is expected to grow at a rate of less than 6%.
Cheap Stocks to Buy: Kroger Co (KR)
There used to be a time when the outlook for traditional supermarket chains was bleak. They were getting squeezed on one side by Walmart’s (WMT) low prices and Whole Foods’ (WFM) natural food and upscale presentation.
Kroger (KR), however, fought back, and now its own natural foods offerings are helping drive more-than-solid growth
In the most recent quarter, KR beat Wall Street’s estimates on the top and bottom lines. Same-store sales — a critical industry metric — likewise exceeded estimates. Most importantly, Kroger hiked its guidance.
Kroger trades in line with its own five-year average forward P/E, suggesting that it could be fairly valued, but other measures point to it being a bargain stock.
KR trades at steep discounts to the broader market by forward and trailing P/E, as well as by PEG. And yet its growth prospects are double that of the S&P 500.
Cheap Stocks to Buy: Pfizer Inc. (PFE)
It’s been a red-hot year for mergers and acquisitions and pharmaceutical giant Pfizer (PFE) has been at the forefront of dealmaking.
PFE picked up Hospira for $17 billion and is pursuing Allergan (AGN). That deal would cost more than $123 billion to create one of the biggest stocks on the market.
Pfizer needs acquisitions to fuel growth because drugs go off patent. It does, however, appear to have at least one new blockbuster — Ibrance — on its hands.
Between new deals and drugs, PFE’s projected long-term growth rate of just 3.25% looks like it will have to come up. A forward P/E of 14 is a large premium to that growth rate, but it’s in line with other big pharma stocks. Pfizer is also cheaper than the broader market.
PFE — up an enviable 9% YTD — has the goods to deliver market-beating gains over the longer term, at least.
As of this writing, Dan Burrows did not hold a position in an overbought market.
