The S&P 500 index has had a strong 2019. As a group, S&P 500 stocks have gained a solid 16.4% this year. All-time highs reached in late April are in sight at the moment, as investors have seen the index as containing several of the best stocks to buy.
Whether that’s good news, however, isn’t clear. At roughly 20 times earnings, the index on the whole is receiving a historically high valuation. With so many external pressures — weakening economies in Europe, tariff concerns, a potential recession in the U.S. — investors would be forgiven for being cautious.
But even in an index near the highs, there are stocks to buy that provide value. These 10 look like the best stocks for the rest of the year. As some of America’s largest companies, these stocks will need help from the market as a whole — and the global economy. But at the very least, whether the S&P 500 rises or falls, here are stocks to buy because they should be able to outperform.
Large-cap tech stocks like Facebook (NASDAQ:FB) have been significant contributors to the rally in S&P 500 stocks so far this year. In fact, DataTrek Research noted this week that just 5 of those stocks accounted for 25% of the S&P 500’s gains so far this year.
The 44% rise in Facebook shares this year alone has driven 0.8 points of growth for the index, per DataTrek’s analysis. But the rally may not be over. FB stock still is reasonably valued, at about 18x 2020 EPS estimates backing out its net cash. Earnings continue to grow at a rapid clip — and the company still hasn’t fully monetized Instagram and WhatsApp.
Regulatory worries seem overblown. Indeed, FB stock already has regained the losses seen after the announcement of an antitrust investigation. For all the negative publicity surrounding the company, users have proven they aren’t going anywhere. The new Libra cryptocurrency doesn’t look like a game-changer, but it does potentially move Facebook further into the payments space.
To some extent, the easy money has been made. But I still think Facebook stock can make new highs, which would imply close to 20% upside. In an index near all-time highs itself, those rewards are worth grabbing.
Amazon.com (NASDAQ:AMZN), too, has created 0.8 points of growth for the S&P 500 index this year. (The other big movers: Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), and Apple (NASDAQ:AAPL).
Like FB, AMZN stock too has a path to new all-time highs. But given those highs only require an 8% move higher, Amazon is going to have to do more to drive real upside from current levels. The company should be up to the challenge.
After all, this is a company that continues to drive literally unprecedented growth, and it’s only getting started. Investments in myriad initiatives are pressuring margins. Amazon can, and will, get more efficient. Same-day delivery will cement its market dominance. Analysts love the stock, and Amazon Web Services provides another long-term catalyst for growth.
To be sure, AMZN isn’t cheap, particularly after a 27% rally so far this year. But it shouldn’t be cheap, and hasn’t been cheap at any point. That hasn’t stopped shareholders from profiting so far — and I expect they will continue to do so going forward.
Bank of America (BAC)
Bank of America (NYSE:BAC) can’t seem to gain any traction. BAC stock has traded sideways — and down — since the beginning of 2018. Earnings are growing, delinquency rates are low, and BAC stock seems to get cheaper and cheaper. Yet investors don’t seem to care all that much, if at all.
To be sure, as I wrote last month, there are external factors at play. The Fed seems ready to cut rates, which will pressure margins for BofA and other big banks. Investors still see a potentially damaging recession on the horizon at some point. BAC stock is cheap, but given those factors, perhaps it should be.
All that said, this still looks like one of the better stocks to buy, and not just among big banks. BAC stock’s price-to-book value is just 1.13x, implying little value for the company’s actual franchise. Wells Fargo (NYSE:WFC) and, to a lesser extent, Citigroup (NYSE:C), continue to struggle, giving BofA room to take more market share.
At a time when stocks on the whole look overvalued, BAC looks cheap. Even if that’s held for the last eighteen months, it’s not going to last forever.
J.M. Smucker (SJM)
But the rally should continue. I also thought SJM was attractive about 14 months at $120 — basically the same price at which it trades at the moment. The company’s pivot away from the tough consumer foods space is showing success. Guidance given with fiscal Q4 results in June was solid, and a 2.8% dividend adds to the case.
And yet, at 14x the midpoint of FY20 guidance, SJM is valued much like the other struggling food-heavy plays, among them Campbell Soup (NYSE:CPB) and General Mills (NYSE:GIS). But the company’s exposure to the stronger coffee and pet food businesses means SJM deserves a premium. Even with the gains since December, SJM isn’t receiving that premium. Assuming it will, more gains are on the way.
To be fair, memory chipmaker Micron Technology (NASDAQ:MU) will need some help to be a star performer in the second half of this year. As Luke Lango pointed out this week, MU stock and other chip plays are staring at big headwinds for the rest of 2019.
Memory prices continue to fall, pressuring Micron earnings. Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA), among others, have projected second-half rebounds in their businesses, but investors are skeptical. Without improvement in those businesses, overall sentiment toward semiconductors stays relatively negative — and that probably keeps MU stock down.
All that said, there’s a path for MU stock to be a big gainer in the second half. Historically, memory chip stocks have started rising before prices do, and so Micron stock can put in a bottom before its earnings do. Support has held in recent weeks around $32, modestly below the current price.
MU stock should be cheap, owing to the cyclical nature of its business, but it’s still probably trading for something like 8x mid-cycle earnings at most. With fiscal Q3 earnings on the way next week, Micron has a catalyst if the earnings report simply isn’t terrible. This still looks like a case where bad news is at least close to priced in — and any tidbit of optimism can send MU stock soaring.
Capri Holdings (CPRI)
One of the few sectors investors currently dislike more than semiconductors is retail. And there is no shortage of reasons to avoid the sector altogether. Whether it’s e-commerce competition, trade war concerns, or the preference of millennials for experiences over things, the long-term outlook for the industry looks cloudy, if not downright stormy.
That said, there are still a few value plays in the space — and Capri Holdings (NYSE:CPRI) looks like one of them. The company has added high-end Jimmy Choo and luxury brand Versace to its Michael Kors business. Management sees years of growth ahead, yet CPRI trades at less than 7x fiscal 2020 EPS guidance.
If management is right, CPRI is going to soar over the long term. And in the near term, Choo and Versace should help sales results over the rest of the year. CPRI touched a seven-year low last month, but the news here simply isn’t that bad. And as Capri proves that over the next two quarters, I expect CPRI stock to have a solid second half.
Shares of Gap (NYSE:GPS) too, touched a multi-year low late last month. In fact, save for a brief 2016 dip, GPS, too, reached its lowest levels in over seven years.
The weakness seems to make some sense. Mall traffic continues to weaken. The ‘preppy’ Gap and Banana Republic brands seem like vestiges of the 1990s. GPS shares are cheap, but it would seem like they should be, particularly after an ugly fiscal Q1 report a few weeks ago.
But I’m still long shares of Gap — and obviously in the red as a result — for one key reason. The story surrounding GPS stock isn’t about Gap, or Banana Republic. It’s about Old Navy, which likely drives at least two-thirds of total earnings, along with smaller ‘athleisure’ concept Athleta.
I wrote last year that Gap needed to do a better job of telling that story –and it’s trying to. The company is spinning off Old Navy later this year. GPS stock soared on that news, but has given back the gains, and then some.
As that spinoff approaches, however, Gap should finally give detail as to Old Navy’s profitability. And I expect that alone will be a catalyst for GPS stock. In the meantime, a 5.4% dividend means investors get paid to wait for the news. There are worries here even with Old Navy, but this still looks like a case where investors are getting at least two of Gap Inc.’s brands for free. Once that becomes clear, GPS stock will rally.
Verizon Communications (NYSE:VZ) doesn’t have the biggest dividend among S&P 500 stocks. In fact, its 4.2% yield is only the 51st highest in the index.
But VZ still might be the best income play of the group. S&P 500 stocks with higher yields generally come from sectors like retail and energy where a dividend cut remains a mid-term risk. Verizon’s dividend, in contrast, should continue to grow.
After all, the company continues to take market share from wireless rival AT&T (NYSE:T). It has a much stronger balance sheet as well. The merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S), should it go through, promises less competition and potentially more pricing power for Verizon.
Indeed, I called out VZ stock as an attractive dividend pick in late January. Verizon stock is modestly more expensive, but the core case still holds. Valuation is acceptable, growth is decent, and a 4.2% yield is roughly double that of the ten-year Treasury. It’s not the sexiest combination in the index, but it’s more than enough to make VZ stock a buy.
There’s no shortage of cheap energy stocks to buy in the S&P 500. Oil services play Schlumberger (NYSE:SLB) is one of the more interesting.
SLB, too, pays an attractive dividend yield, at 5.5%. The stock is cheap, in fact trading at levels last seen during the nadir of the financial crisis. Wall Street, at least, sees the sell-off as badly overdone, with an average target price of $52 suggesting 35% upside from here.
There are risks. Even with U.S. shale activity up, worldwide demand seems muted. Oil prices have rallied on news on tensions with Iran, but still remain relatively low from a multi-year perspective. That could make some future drilling projects uneconomical — lowering demand for Schlumberger’s services.
Still, the SLB stock price incorporates at least some of those concerns. It’s outgrowing rivals Baker Hughes, a GE company (NYSE:BHGE) and Halliburton (NYSE:HAL). And it’s an intriguing play for both energy bulls and income investors willing to take on some risk.
Lamb Weston (LW)
The narrative has turned for potato producer Lamb Weston (NYSE:LW). After the company’s 2016 spin-off from Conagra Brands (NYSE:CAG), Lamb Weston could do not wrong. The company continually outperformed both its guidance and analyst expectations. The industry looked healthy. Key customer McDonald’s (NYSE:MCD) continued to grow sales. And LW stock kept rising: by late last year it was up about 150% from its spin-off price.
Since then, however, investors have become cautious, and not necessarily because of anything that Lamb Weston itself has done. Rather, the perception became that the industry was almost too good. Capacity was tight, allowing Lamb Weston and rivals like Ore-Ida and McCann to take significant pricing. That would change (and is changing). Crop yields had been fantastic, and at some point would change (as was the case in Europe recently, and may again be in the U.S. this year). Lamb Weston, bears argued, was near something close to a peak.
At $80+, those concerns were valid. Back in the low $60s, however, LW looks cheap again. Two analysts have upgraded the stock of late — and with good reason. Growth might not be what it’s been for the past few years, but the broader tailwinds persist. French fry demand should increase overseas. McDonald’s revenue continues to be solid. And Lamb Weston’s Grown in Idaho line is taking huge market share in supermarkets.
With fiscal Q4 earnings on the way next month, Lamb Weston has the chance to turn the narrative back in its favor. If the company gives strong FY20 guidance, as I expect it will, LW should recapture at least some of the 25% losses it’s seen since late December — which means double-digit upside at least.
As of this writing, Vince Martin is long shares of Gap Inc., and has no positions in any other securities mentioned.