The big scary monster that is inflation is back. And with the 10-Year Treasury Yield creeping back toward 3%, that means it is time for investors to start looking for safety in low P/E stocks.
That’s because bonds and stocks are competing investment vehicles. Bonds are considered safer, so they have lower yields. When bond yields rise and start to look like equity yields, however, investors will sell stocks and buy bonds.
In this major shift, the first stocks to get dumped are the big P/E stocks, since they have the lowest earnings yields. The last stocks to get dumped are the low P/E stocks, since they have the biggest earnings yields.
Granted, the market is trading at 16-times forward earnings, which is equivalent to a 6.25% earnings yield. The 10-Year Treasury yield is at 2.9%. Clearly, bond yields still have a long ways to go before they match equity yields.
Nonetheless, low P/E stocks are a good place to hang out in a rising rate environment.
With that in mind, here are my three favorite low P/E stocks that should succeed in today’s market environment:
Low P/E Stocks to Buy #1: Dick’s Sporting Goods Inc (DKS)
One of my favorite low P/E stocks in the market right now is sporting goods retailer Dick’s Sporting Goods Inc (NYSE:DKS).
All of retail is staging a huge comeback right now. It turns out that retailers weren’t just sitting back and getting their butts kicked by Amazon.com, Inc. (NASDAQ:AMZN). Instead, they shrank their real estate footprint to accommodate lower in-store sales volume, refreshed their continuing store base to be more modern and built out robust omnichannel capabilities. The sum of these actions has brought an end to the retail apocalypse, and consequently, retail stocks are bouncing.
DKS is one of the most promising stocks in the retail segment. The numbers look tasty. The stock trades at less than 13-times forward earnings, implying a near 8% earnings yield. The dividend yield is in excess of 2%, and there are lots of buybacks in the mix.
Meanwhile, the story at DKS continues to get better. Comparable sales trends are improving. Margin erosion is moderating. Athletic retail is red hot. Signs are pointing to the fact that early bankruptcies in the sports retail world will allow DKS to grow market share over time. And the company has proven to be a critical and indispensable part of the product distribution model in athletic retail.
As such, this is a stable growth company trading at a discounted valuation, a combination that makes DKS stock look like a winner here and now.
Low P/E Stocks to Buy #2: Skechers USA Inc (SKX)
For some reason, athletic footwear and apparel brands like Nike Inc (NYSE:NKE), Under Armour Inc (NYSE:UAA) and Adidas get these huge above-market valuations, while Skechers USA Inc (NYSE:SKX), despite being in the same business, trades at a paltry 13-times forward earnings multiple.
Obviously, I know the reason. Nike, Under Armour and Adidas are cool. Skechers is not.
Despite not being cool, Skechers has carved out long-term value for itself as a go-to retailer of comfortable and affordable athletic footwear in the sub-$100 category. Because of that, Skechers is a global growth company with enduring value.
Indeed, you probably wouldn’t have guessed it, but in the Nike/Under Armour/Adidas/Skechers crowd, Skechers has the biggest revenue growth, thanks to robust international growth. And the big revenue growth is happening alongside margin expansion, so profit growth is bigger.
This isn’t a near-term phenomenon; This big growth at SKX has been happening for a while now.
The stock is down right now after reporting what the market viewed as a bad quarter. But this weakness is a buying opportunity into a global growth brand trading at a huge discount.
Low P/E Stocks to Buy #3: Apple Inc. (AAPL)
In the world of low P/E stocks, it’s tough to find a Big Tech company. Most of those industry titans with global influence are trading at huge multiples. But not Apple Inc. (NASDAQ:AAPL).
The iPhone maker trades at just 15-times forward earnings. Smells like a bargain to me.
Granted, Apple stock doesn’t deserve a huge 25 or bigger forward multiple. The company is already massive, and growth at these levels is tough to come by. But a 15-times forward multiple seems too cheap.
There are plenty of AAPL stock bears out there pounding on the table about slowing iPhone growth. That is certainly happening. The smartphone market is maxed out, and unit growth in Apple’s smartphone business will be slow on a go-forward basis.
But that doesn’t really matter.
The Apple growth story going forward is one part hardware, two parts software. Apple has developed a series of services, like iCloud, App Store, and Apple Music, to monetize its unrivaled ecosystem of addicted iPhone users. This business is big growth and big margin, so the whole Apple business is looking at super-charged profit growth over the next several years, regardless of a flattish hardware business.
Altogether, Apple stock looks like a great low P/E stock to buy and hold, even considering slowing iPhone demand.
As of this writing, Luke Lango was long DKS, AMZN, SKX and AAPL.