Stocks continue to get more expensive despite the trade war headwinds investors face in the weeks ahead. S&P 500 stocks currently trade at 24 times trailing earnings and 17 times forward earnings making the selection of new additions to a portfolio that much more difficult.
With earnings season upon us, investors naturally will be looking to see which companies are easily beating earnings estimates before laying down their bets.
However, if July 9 trading is any indication — the Dow Jones Industrial Average and S&P 500 were up 1.3% and 0.9% respectively — now is the perfect time to get in on S&P 500 stocks.
“We’re on the eve of what’s going to be a dynamite earnings season,” Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama, said on July 9, according to Reuters. “The angst going into last Friday [July 6] was pretty significant, and now, with the realization that we’re here and the world hasn’t come to an end … the money is falling in.”
So, which should you be buying?
Well, if you like S&P 500 stocks with low P/E ratios, try these seven on for size.
S&P 500 Stocks With Low P/E Ratios: Newell Brands (NWL)
If you bought Newell Brands (NYSE:NWL) at this time last year, I feel your pain, given it is down 48% since then.
Not only did Newell do a terrible job integrating its multi-billion-dollar acquisition of Jarden Brands in 2016, it then went on to have a major row with activist investors including Starboard Value and Carl Icahn, who owns 7% of its stock.
Fortunately, Icahn and Starboard came to an amicable solution with the company that will see it implement a plan to deliver more value for shareholders.
It’s selling some of its least attractive assets, which will reduce debt by as much as $4.5 billion. By cutting its interest payments and generating free cash flow, it will proceed to buy back as much as $5.5 billion of its stock which is currently trading at below 10 times its forward earnings, a multiple that’s considerably less than the 17 times forward earnings it traded at before the Jarden acquisition.
I thought Newell was a good buy last November when it was trading at $29; given the work it’s doing to rightsize the business, anywhere in the $20 area should be a good entry point.
S&P 500 Stocks With Low P/E Ratios: Goldman Sachs (GS)
The problem with Goldman Sachs Group (NYSE:GS) stock is that the investment bank is unable to reward its shareholders by as much as it would like. This came after the Federal Reserve putting it on a short leash after the recent stress tests showed its capital plans would have brought it below the required Tier 1 leverage ratio.
The problem, however, is thought to be a one-time situation, and GS should be able to return more to shareholders next year. As it stands, Goldman Sachs had planned to pay out $9.9 billion this year but has only paid out $5.7 billion and will likely only payout $8 billion by the end of the fiscal year.
“Marcus offers unsecured loans of $3,500 to $40,000 at rates of 7% to 25%. It doesn’t charge origination fees or late fees. Its average loan is for $15,000 over four years with a 12% interest rate,” Bloomberg reported June 29. “Even with Marcus paying an above-average 1.8% interest rate to savers, that’s a pretty good margin.”
Lending to the middle class might not be sexy, but until the economy goes south, it’s going to be very lucrative for the investment bank and a moneymaker for shareholders.
S&P 500 Stocks With Low P/E Ratios: CVS Health (CVS)
There’s nothing like Amazon.com (NASDAQ:AMZN) getting into a new business vertical to give CEOs in that industry a major case of heartburn.
That’s what happened to CVS Health (NYSE:CVS) stock June 27 after the e-commerce giant announced it was buying Boston-based PillPack, an online pharmacy with annual revenues in excess of $100 million.
CVS and the other two large drug store chains lost $11 billion in market cap in a single day of trading putting all three firms on the defensive.
“We already have the capabilities that PillPack is offering and we have scale in the business. Keep in mind, that we have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy,” CVS Health stated responding to CNBC’s request for comment. “And for those patients that do desire to transition, we offer the option to ship their prescriptions to their home from our pharmacies or obtain the prescriptions through our Caremark mail facilities.”
Investors don’t like uncertainty, so it’s only natural that the markets reacted negatively to the news. However, CVS has been at this a long time. I highly doubt Amazon is going to be able to knock it off its perch.
Yes, it’s going to have to work a lot harder, but with an almost 3% dividend yield and an earnings yield close to 10%, the rewards should outweigh the risks over the next 3-5 years.
S&P 500 Stocks With Low P/E Ratios: Cummins (CMI)
According to Finviz.com, Cummins (NYSE:CMI) is the 13th worst-performing S&P 500 stock year to date through July 9. It’s not alone, however, as 232 S&P 500 stocks are also in the red in 2018, much higher than a year earlier.
With its performance in 2018 the second-worst over the past decade — it had a negative annual total return of 37% in 2015 — now is a good time to be contemplating a long-term buy of its stock … Here’s why.
On July 2, Cummins announced that it was acquiring Efficient Drivetrains, a Silicon Valley company that manufactures hybrid-electric drivetrain systems, a sign that it’s serious about the electrification process.
“As the industry continues to evolve and OEMs move to include hybrid and electric technologies in their vehicle offerings, the combination of Cummins and EDI represents a tremendous opportunity for growth and category leadership,” said Joerg Ferchau, EDI’s Chairman and Chief Executive Officer. “EDI’s advanced portfolio of plug-in-hybrid and full electric technologies paired with Cummins’ industry leadership and focus on innovation will allow us to deliver best-in-class products, service and support worldwide.”
If you look at the company’s Q1 2018 results, its electrified power segment accounted for just $2 million of its $5.6 billion in overall revenue. Acquisitions like Efficient Drivetrains will deliver real revenues in the years ahead.
I expect it will be a leader in electric as it has been in diesel and natural gas truck engines. Buying today gets you in ahead of the curve.
Long-term, it’s a winning bet.
S&P 500 Stocks With Low P/E Ratios: Cardinal Health (CAH)
Cardinal Health (NYSE:CAH) distributes pharmaceuticals and other medical supplies to hospitals and pharmacies. CVS is its largest customer.
Hence, if I like CVS, I ought to like the company that provides a lot of the drugs to CVS’s retail pharmacy operations.
Yielding 3.9% and generating $2.6 billion in trailing 12-month free cash flow (FCF), CAH stock ought to be on any dividend income investor’s buy list.
While the drug distribution bulks up the top line — $29.7 billion in Q3 2018 segment revenue — it is Cardinal Health’s medical products segment that investors ought to focus their attention on.
Although the medical segment accounted for just 12% of the company’s revenue in the third quarter, it delivered 25% of the operating profit with year over year growth of 34%.
I love businesses that have one segment that keeps the lights on while another supplies the growth.
Back to that free cash flow.
With an enterprise value of $22.5 billion — $15.6 billion market cap plus $9.0 billion in debt less $2.2 billion in cash — it has a FCF yield of 11.6%, well within the value investor’s definition of inexpensive.
S&P 500 Stocks With Low P/E Ratios: Micron (MU)
That hasn’t worked out too well, as MU stock has managed to appreciate by 8.3% since compared to a decline of 12% for Western Digital.
CNBC’s Jim Cramer rushed to the defense of Micron, suggesting that its business has never been financially stronger providing investors with a P/E ratio lower than virtually every stock on the S&P 500.
“[Micron is] the lowest, cheapest stock in the S&P 500,” Cramer said June 21. “How much more is that earnings power worth to you if it’s coming from the most complicated cellphones or the amazing data centers that support the cloud and artificial intelligence?”
It doesn’t seem to matter what Micron does in terms of earnings and buybacks, investors aren’t willing to give it the same due other chipmakers get. Add to that the fact Micron chips have been temporarily banned from China and you’ve got negative investor sentiment that’s hard to overcome.
As Cramer points out, Micron has got too much free cash flow to ignore. The Chinese problem will pass, as will the negative investor sentiment.
Long-term, Micron’s a winner.
S&P 500 Stocks With Low P/E Ratios: NRG Energy (NRG)
However, it trades at a forward P/E of 20, about double that of NRG Energy (NYSE:NRG), so for the purposes of this value article, I’m going to go with the New Jersey-based utility that owns the naming rights to NRG Stadium, the home of the 2017 Super Bowl.
The game gave the utility an opportunity to spread the word that’s it about a lot more than just coal-fired power plants which it is converting to natural gas.
Activist investor Elliott Capital Management and others pushed the company to undergo transforming itself in 2017 with plans that included selling some of its businesses and reducing its debt.
In the middle of its transformation, NRG’s Q1 2018 results showed enough improvement — continuing operations went from a loss to a profit year over year — that its stock is definitely worth considering if you’re a value investor.
I wouldn’t recommend it, however, if you’re a dividend income investor because it’s not out of the woods completely.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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