The S&P 500 is one of the oldest and most widely used market index for U.S. stocks. The index — which does change over time — consists of 500 large-cap stocks, chosen to provide a diversified profile of the U.S. stock market — and the U.S. economy. S&P 500 stocks must have a minimum market capitalization (currently $6.1 billion)
As such, the S&P 500 can be a good starting point for stock-picking. Most S&P 500 stocks have a long history of profitability and growth. Many, though not all, pay dividends (the index as a whole currently yields about 1.9%). The S&P 500 is made up of established, and often dominant, companies — exactly the kind of companies long-term investors should seek to own.
With the market not far off all-time highs, valuation is a question mark. But among the 500 issues, there’s still value to be found. Here are 20 of the best S&P 500 stocks for the second half of 2018, all of which have a good chance of outperforming their high-powered peers.
20 Best S&P 500 Stocks: Kraft Heinz (KHC)
I wrote last month about the unsurprising carnage in consumer stocks, and Kraft Heinz Co (NASDAQ:KHC) hasn’t been immune. KHC has dropped 25% so far this year — a stunning decline for what is normally considered a relatively “safe” stock with volatility below that of the market as a whole.
And there are some concerns here. KHC still has a rather large debt load: over $30 billion in short-and long-term debt, more than four times the company’s EBITDA. Q1 results showed a year-over-year decline in organic revenue, with adjusted EBITDA dropping 2.6%. Earnings did rise against Q1 2017, but only due to a lower tax rate.
Still, the sell-off looks like it has gone too far. KHC yields around 4.3%, attractive even in a time of rising Treasury yields. It trades at less than 15x forward earnings. That’s a historically low multiple, and one cheaper than other, similarly struggling, large-cap consumer plays like Procter & Gamble Co (NYSE:PG) and PepsiCo, Inc. (NASDAQ:PEP).
Kraft Heinz is facing significant challenges, and it’s still not as safe as some investors might believe, but there’s real value here as well. Even modestly improved performance going forward could lead to big upside for KHC.
20 Best S&P 500 Stocks: Constellation Brands (STZ)
The primary concern when it comes to Constellation Brands, Inc. (NYSE:STZ, NYSE:STZ.B) is valuation. STZ has risen 318% over the past five years. It trades at 21x forward earnings — a big multiple given potential challenges to its beer brands like Corona and Modelo, and modest growth rates in the liquor space.
But from here, it looks like STZ simply has taken a breather. The stock actually is down 1% so far this year, one reason why I picked it to be one of the stocks that would turn from loser to winner this year. Longer-term, there’s still potential benefits from the company’s entrance into the marijuana space, and self-driving cars could benefit the liquor and beer businesses.
Again, STZ isn’t cheap, but it shouldn’t be, and hasn’t been for a long time. With strong brands and potential industry tailwinds on the horizon, this looks like a case where investors are paying for quality.
20 Best S&P 500 Stocks: Broadcom (AVGO)
Broadcom Inc (NASDAQ:AVGO) has rebounded nicely since I recommended the stock back in late April. After the company’s acquisition of Qualcomm, Inc. (NASDAQ:QCOM) was blocked by the U.S. government, investors seemed to forget that Broadcom had a valuable business of its own. AVGO shares were priced as if the company’s organic growth was zero, or close to it.
Even with a 17% bounce, however, I think there’s more upside to come in the second half of the year. AVGO still is cheaper than Intel Corporation (NASDAQ:INTC), despite having stronger growth and lower exposure to the struggling PC space. A 2.7% yield looks attractive. And it’s possible Broadcom could continue its M&A elsewhere — a strategy which has proven to be a long-term winner for the company.
With the chip space increasingly looking set for long-term growth, with tailwinds like automotive adoption and Internet of Things, owning a leader in the space seems like a good plan. Owning that leader at less than 13x forward earnings seems even better.
20 Best S&P 500 Stocks: Applied Materials (AMAT)
Another option in the chip space is equipment maker Applied Materials, Inc. (NASDAQ:AMAT). AMAT shares fell 8% last month after a weak outlook for the company’s fiscal third quarter. On this site, both Nicholas Chahine and Joseph Hargett argued the weakness was a buying opportunity — and I’m inclined the agree.
Indeed, investors already have started to buy the dip, with AMAT recovering close to half of those post-earnings losses. And it’s not hard to see why. AMAT trades at just 11x forward earnings. Slowing smartphone growth is a concern, but Apple Inc. (NASDAQ:AAPL) has shown the space is stronger than some feared.
There are risks here if chips are going to slow down, given the leverage AMAT and rival Lam Research Corporation (NASDAQ:LRCX) have to semiconductor growth. But if that growth does pick up, that leverage should drive AMAT back to all-time highs above $60.
20 Best S&P 500 Stocks: United Parcel Service (UPS)
United Parcel Service, Inc. (NYSE:UPS) has had a surprisingly volatile 2018. The stock opened the year strong, climbing 13% in the first two weeks. And then the bottom fell out. Q4 earnings in late January raised fears of higher capital spending to improve the company’s operations. Two weeks later, Amazon.com, Inc. (NASDAQ:AMZN) sent UPS and FedEx Corporation (NYSE:FDX) shares tumbling after it trialed its Shipping With Amazon service.
UPS wound up losing a quarter of its value in less than three months. But the stock has steadily rebounded, as investors have realized — rightly, in my opinion — that those fears were overwrought. I bought the dip myself, and I’m still happily long UPS. E-commerce presents a long-term tailwind. Amazon could be a fearsome competitor, but the market remains essentially an oligopoly for now, and market growth could make room for another entrant.
In the meantime, investors own an industry leader for less than 15x earnings and with a 3.1% dividend yield. It’s a price that still incorporates many of the risks here, but very few of the rewards.
20 Best S&P 500 Stocks: 3M (MMM)
3M Co (NYSE:MMM) is another industry leader whose shares look simply too cheap. MMM has pulled back some 22% from late January highs, dogged by concerns about a trade war and cyclical factors in the industrial space.
But here, too, the decline looks simply too steep. MMM touched a 13-month low in early May before a very modest bounce. Growth has slowed, but remains nicely positive, and yet the stock trades at less than 18x forward EPS.
The risks here can’t be completely dismissed, and even Wall Street is cautious, with the average target price suggesting barely 6% upside. But this looks like a case where the market is simply too worried — and is forgetting about the 116 years of success 3M has enjoyed so far.
20 Best S&P 500 Stocks: JP Morgan Chase (JPM)
Big bank stocks have stalled out this year, and that presents an opportunity in shares of JPMorgan Chase & Co. (NYSE:JPM). JPM stock has pretty much stalled as well, but at $110, the stock sits modestly above support levels at $105 that have held repeatedly.
Meanwhile, 2018 earnings growth should be impressive, thanks to tax reform and higher interest rates. 2019 should show more gains from higher net interest margin as well. JPM’s credit card business is performing well, including a big hit with its Sapphire Reserve card. And yet JPM trades at just 11x forward earnings, and a still-low 1.6x book value.
The big risk to JPM — and to the financial space as a whole — is a cyclical downturn in the economy. That’s one reason why shares have been rattled by trade war concerns and the political upheaval in Italy, among other factors. But for investors willing to take that risk in the market as a whole, JPM looks like one of the more attractive options, and one of the two best large-cap financial stocks to buy.
20 Best S&P 500 Stocks: Bank of America (BAC)
The other big bank stock that looks attractive is Bank of America Corp (NYSE:BAC). And the case for BAC is somewhat similar to that of JPM. BAC, too, looks like it’s too cheap, at 10x earnings and less than 1.3x book value. Higher rates will help its consumer business — which shows strong performance in terms of write-off and charge-offs.
Like JPM, BAC has had a choppy 2018 (the stock actually is down modestly so far this year, by less than 1%) — and like BAC, there’s the potential for real gains here. The Street average target price suggests nearly 20% upside.
Combined with a 1.6% dividend yield that should climb over the next two years, and BAC too still looks like a solid, if more consumer-focused, financial play.
20 Best S&P 500 Stocks: The Cooper Companies (COO)
I’ve admittedly gone back and forth on contact lens manufacturer Cooper Companies Inc (NYSE:COO). Back in October, I called it one of the 10 most expensive S&P 500 stocks. I’ve been concerned about COO’s valuation for some time, as much as of its gains have come from multiple expansion — not just earnings growth.
But COO has pulled back, dropping over 13% from early March levels and nearly 10% from when I called it expensive eight months ago. In the meantime, impressive growth has continued, with revenue rising 18% and non-GAAP EPS up 45% in the company’s fiscal Q1. COO now trades at a much more reasonable 18x forward earnings — against figures that were as high as 22x-23x last year.
There are some risks here. Rival Bausch + Lomb, a division of Valeant Pharmaceuticals Intl Inc (NYSE:VRX), is showing better numbers as it attempts a turnaround. Cooper benefited from soft competition from both B+L and Novartis AG (ADR) (NYSE:NVS) — and that may be changing. B+L is improving, and Alcon could be spun off or sold next year.
Still, worldwide market growth has been solid, and long-term opportunities exist in developing markets. Cooper has nicely taken share over the years, making it No. 2 behind Johnson & Johnson (NYSE:JNJ), and positioning itself for more share gains going forward. At 22x EPS, a lot of the good news looked priced in. At 18x, the story looks much more attractive.
20 Best S&P 500 Stocks: Oracle (ORCL)
In a tech space that looks expensive, Oracle Corporation (NYSE:ORCL) looks downright cheap. What’s unclear at the moment is whether ORCL should look cheap.
As I wrote back in February, the argument over ORCL comes down to one question: is ORCL the next Microsoft Corporation (NASDAQ:MSFT)? Or is the next IBM (NYSE:IBM)? Is there a turnaround on the horizon, as it catches up to peers, as Microsoft did? Or has tech simply moved away from the company, leading to a multi-year period where ORCL wanders in the wilderness, as IBM has for some time?
At the time, I recommended betting on ORCL. And even with the stock down another ~6% in large part due to a disappointing fiscal Q3 report, I still think that’s the right play. It’s too early to write off Oracle just yet – but the market, given a 14x forward EPS multiple, is starting to do just that.
It’s possible that Oracle will be outmaneuvered in the cloud space. But at the moment, and at this valuation, I still think that’s a risk worth taking.
20 Best S&P 500 Stocks: Dollar General (DG)
There’s no shortage of concerns when it comes to retailer Dollar General Corp. (NYSE:DG). The stock fell 8% after Q1 earnings in late May missed estimates on the top and bottom line. That performance in turn seemed in turn to support fears that more aggressive pricing from Walmart Inc (NYSE:WMT) could pressure sales for DG and peers like Dollar Tree, Inc. (NASDAQ:DLTR) and Big Lots, Inc. (NYSE:BIG). On this site, Josh Enomoto even made the case that the economy was too good for Dollar General.
All that said, DG is a premium retailer trading at under 14x earnings. Its role in many of its small-town markets is significant. The company sees room for thousands of additional stores, and earnings growth remains solid and same-store sales positive.
There are risks here, both in terms of sales and higher costs that could impact margins. But this is an established retailer with years of success behind it — and limited threat from e-commerce/omnichannel alternatives. Dollar General, one way or the other, should be able to grow earnings, and that alone suggests upside in DG stock going forward.
20 Best S&P 500 Stocks: Pfizer (PFE)
Shares of Pfizer Inc. (NYSE:PFE) have been basically flat since October — which hardly sounds like impressive performance. But given the recent history of pharma and biotech stocks, flat isn’t that bad. Of late, Mallinckrodt PLC (NYSE:MNK) and biotech Celgene Corporation (NASDAQ:CELG) have plunged, after stocks like Valeant and Teva Pharmaceutical Industries Ltd (ADR) ADR (NYSE:TEVA) saw sharp declines in past years.
Given that history, investors would be forgiven for ignoring the space altogether. President Donald Trump has talked of lowering drug prices, and that pressure persists worldwide. Blockbuster drugs appear harder to find. Pfizer stock itself still trades below early 2000’s peaks.
But there’s a case for PFE at current levels — even if investors should keep their expectations low. Current multiples basically suggest Pfizer will post zero earnings growth. The company offers a 3.7% dividend yield as well. Even “muddling through” probably drives decent annual returns. For its part, Wall Street sees about 10% upside (not including that dividend), and it doesn’t look like the Republican-led government is all that interested in really cracking down on manufacturers.
Again, Pfizer isn’t a stock that’s likely to make a torrid move. But at this price, it’s a stock that can grind out above-market returns.
20 Best S&P 500 Stocks: Goodyear (GT)
On the other side of the coin is Goodyear Tire & Rubber Co (NASDAQ:GT), likely the riskiest stock on the list. Indeed, one of the key near-term risks is the possibility of GT being moved out of the S&P 500 index, which would lead to much lower demand from funds and push GT’s share price even lower.
That would be a big problem, given that GT already trades near its lowest levels in four years. And there are reasons for concern here. Volumes fell 2.5% in a disappointing first quarter. Higher oil prices led adjusted EPS to drop by nearly one-third. Chinese competition remains an issue, and long-term self-driving cars could be a negative for Goodyear, assuming technology leads to more carpooling and fewer miles driven.
That said, as Enomoto pointed out last month, the shift to SUVs and trucks represents a positive for Goodyear. Indeed, Q1 revenue rose despite the volume decline, thanks to higher pricing. GT now trades at just 6x forward earnings, a multiple that suggests earnings will decline for the foreseeable future.
Those declines may come, but they are getting awfully close to priced in. And so value investors might try and take the risk of timing the bottom in GT — and believing that the declines of the last four years are at or near an end.
20 Best S&P 500 Stocks: Ford Motor Company (F)
Another cheap auto stock is Ford Motor Company (NYSE:F) — and it, too, looks too cheap. Even after a recent rally, F trades at less than 8x forward earnings. And I continue to believe, as I argued last month, that investors haven’t given enough credit to the company’s recent strategic change.
The company’s decision to pretty much end its manufacturing of cars in North America – save for the iconic Mustang — is a potential game-changer. Ford simply never found the formula to compete with Toyota Motor Corp (ADR) (NYSE:TM) or Honda Motor Co Ltd (ADR) (NYSE:HMC) in that market segment. The decision will cut costs across the board — and also free up cash to support a dividend that still yields over 5%.
Admittedly, the shift does raise some risk, particularly for Ford’s U.S. sales. If oil prices (and thus gas prices) rise, consumers could swing back toward smaller cars and leave Ford out in the cold. The “peak auto” concerns I detailed a year ago have to be considered as well. But a smaller, more nimble Ford should be a more profitable Ford. And that should be good news for Ford stock.
20 Best S&P 500 Stocks: McCormick (MKC)
McCormick & Co/SH SH NV (NYSE:MKC) has been one of the few stocks to escape the battering that grocery stocks and their suppliers have taken this year. MKC shares are down less than 1% so far this year — which, believe it or not, is one of the best performances in the entire industry.
With the stock back near a four-month low, there’s a nice entry point here. MKC does have a good deal of debt from its acquisition of brands from Reckitt Benckiser (OTCMKTS:RBGLY) last year. And considering that debt in valuation, the stock’s EV/EBITDA multiple is one of the highest in the CPG sector.
But McCormick generates a lot of cash, which should help reduce the debt — and in turn lower interest expense, helping free cash flow. The spices & seasonings category is one of the few growing areas in grocery, and demand from millennials is actually higher than that of their parents (unlike areas like cereal, soda, and cookies). I still think MKC is a matter of paying up for quality — one reason it’s a pillar of my own portfolio. Near a 2018 low, MKC looks like a nice buy here.
20 Best S&P 500 Stocks: Apache (APA)
Oil exploration play Apache Corporation (NYSE:APA) largely has been left out of the rally in oil stocks. The stock actually is down nearly 7% so far this year — a surprise given the strength in oil prices. Fellow S&P 500 component Anadarko Petroleum Corporation (NYSE:APC) is up 29%, for instance, and majors like Exxon Mobil Corporation (NYSE:XOM) and BP plc (ADR) (NYSE:BP) have performed well, at least since February lows.
The underperformance so far makes APA look attractive heading into the second half of the year — particularly if oil prices cooperate. As an E&P pure play, it’s a much better stock to buy on oil prices than XOM or its peers, who see drags from higher oil prices elsewhere in their businesses.
And with APA lagging a number of other E&P stocks, there’s a case that it should catch up in the second half of the year — even if oil prices stay at current levels.
20 Best S&P 500 Stocks: Delta (DAL)
Airline stocks like Delta Air Lines, Inc. (NYSE:DAL) have sputtered a bit this year. A strong economy should set up a solid summer travel season. But those rising oil prices have taken some of the sheen off DAL and peers like Southwest Airlines Co (NYSE:LUV).
There’s still reason for optimism going forward, however. Travel spending is only set to rise. Capacity discipline seems intact across the industry. Developing nations should help demand for international travel.
And DAL stock remains one of the cheapest in its industry. Those reasons are why I called DAL a compelling buy back in April, and even a couple points higher I still believe that to be the case.
20 Best S&P 500 Stocks: Alcoa (AA)
Yet AA stock still hasn’t gotten much of a bump. Indeed, AA has dropped 7% so far this year. And it leaves one of the world’s leading industrials looking awfully cheap. AA trades at just 11.5x forward earnings. The average analyst target price of $67 suggests roughly 35% upside from current levels.
There are cyclical concerns here, but higher pricing could go a long way to easing those concerns. And at the current price, investors seem to get some optionality from tariff help for something close to free.
20 Best S&P 500 Stocks: Adobe (ADBE)
In a hot tech space, Adobe Systems Incorporated (NASDAQ:ADBE) somewhat quietly has been one of the best performers. The stock has gained 77% over the past year — and 221% over the past three. And I don’t think the run is at an end.
Revenue is expected to grow a whopping 20% this year. Margins are high and rising. The transition to cloud isn’t just shifting revenue; it’s growing the top line for Adobe (as has turned out to be the case for Microsoft, but on a broader scale). And Adobe’s Experience Cloud is showing some success in the marketing space against entrenched rivals like Salesforce.com, Inc. (NYSE:CRM) and Oracle Corporation (NYSE:ORCL).
ADBE is far from cheap, at 34x next year’s earnings. (The multiple does come down a bit when considering the company’s net cash.) But given likely mid-teen earnings growth at least, that multiple will narrow quickly. And with the company possibly an acquisition target (Microsoft is a long-rumored suitor), there’s still room for ADBE to post more gains even after its torrid run.
20 Best S&P 500 Stocks: CBS (CBS)
A messy legal battle at CBS Corporation (NYSE:CBS) has obscured a very attractive stock. Shari Redstone, daughter of Sumner Redstone, wants to merge CBS and Viacom, Inc. (NASDAQ:VIA, NASDAQ:VIAB) — both of which are controlled by the Redstone family. The CBS board is against the deal for a number of reasons, among them the fact that key Viacom networks like MTV and Comedy Central are struggling.
For now, the merger is off — but either way, CBS is too cheap. As I wrote after the Q1 report, CBS actually is benefiting from cord-cutting, not just surviving the trend as so many peers. While investors pay astronomical multiples for Netflix, Inc. (NASDAQ:NFLX), and talk up the streaming potential at Walt Disney Co (NYSE:DIS), CBS already is winning through its All Access platform and placement on MVPDs like Hulu and YouTube TV.
Despite that success — and a big Q1 — CBS trades at 8.5x earnings. The Viacom deal as structured probably isn’t a great move, but it’s not enough to justify that kind of discount to the media space, or a valuation that suggests CBS is headed for declines. Once the Viacom mess is settled — either way — investor attention will turn towards CBS’ performance, earnings, and multiples. And that will likely lead the stock higher — with or without Viacom.
As of this writing, Vince Martin is long shares of McCormick & Co. and United Parcel Service. He has no positions in any other securities mentioned.