S&P 500 stocks have been a mixed bag at best this year. During the week of June 21, I think the market began to accept the idea that a ” soft landing” by the economy is much more likely than a “hard landing.” Of course, the market rallied during the week.
As further evidence of the Street’s renewed optimism, Goldman Sachs economist Jan Hatzius, speaking on Bloomberg TV on June 24, said that any recession would probably be “on the shallow end.”
Even more bullish was RBC Capital Managing Director Gerard Cassidy, who told Bloomberg TV on June 24 that “as long as the job market stays strong, (U.S.) consumers will be in good shape.”
With the Street realizing that the economy is not going to crash, I believe that there are many good S&P 500 stocks to buy.
Meanwhile, as Bloomberg TV’s Lisa Abramowicz pointed out on June 24, many market participants now think that Fed Chairman Jerome Powell will be less “hawkish” on inflation than the Street has generally believed in recent months.
In this environment, the best S&P 500 stocks for long-term investors to snap up are names that unjustifiably tumbled.
The seven S&P 500 stocks are:
|GOOG, GOOGL||Alphabet||$2,245.13; 2,234.03|
Deere (NYSE:DE) tumbled nearly 16% in the last month. Recession fears appear to have played a key role in the retreat.
One of the Street’s most prominent bears, Morgan Stanley cut its rating on one of Deere’s competitors, Agco (NYSE:AGCO) on recession fears. In fact, the firm mentioned the effects of “a more draconian macro/recession scenario” as a key reason for its downgrade.
I expect U.S. consumers’ strength to enable America to avoid a recession (I explained my view on the issue more fully in this June 11 column).
America’s economic strength along with a likely further decline in oil prices should keep Europe and South America from falling off a cliff.
Meanwhile, food prices are likely to remain elevated, keeping Deere’s core customers — farmers — quite strong. With DE stock trading at a rather low forward price-earnings ratio of 14, this is one of the S&P 500 stocks whose outlook is quite attractive.
Not only are those worries overdone due to a misreading of the macro environment, but Alphabet is significantly more resilient than many of its peers.
The company will probably not be meaningfully hurt by consumers’ current transition from goods to services, while reductions in “brand identity” ads will also not greatly affect its results.
Of course, its commanding position in the search engine sector largely shields it from competition issues.
Meanwhile, as I also pointed out in the previous column, Alphabet’s self0driving vehicle unit, Waymo, should lift GOOG stock over the longer term.
The forward P/E ratio of GOOG stock has declined to a reasonable level of 19, making it one of the more solid S&P 500 stocks to buy.
Visa (NYSE:V) stock has tumbled nearly 9% in the last month, but Bank of America earlier this month released data showing that the spending of its American credit card and debit card customers had jumped 9% year-over-year in May.
“Credit card spending rose by 16% year-over-year, while debit card spending increased by 4%,” the bank reported.
The increase in credit card spending by Bank of America’s U.S. customers bodes very well for the outlook of Visa, the country’s largest credit card network. As with Alphabet, Visa is poised to benefit from consumer spending on services and experiences.
Indeed, analysts, on average, expect the company’s earnings per share to climb from $5.91 last year to $7.16 this year to $8.40 in 2023.
Visa’s forward P/E ratio, based on the average 2023 EPS, is a somewhat elevated 24. Given the company’s expected strong profitability, and the expected and significant increase in its profit, V stock is fairly cheap.
NextEra (NYSE:NEE) says that it’s the “world’s largest utility company.”
In addition to owning the largest electric utility in Florida, the company creates more electricity from wind and solar energy than any other company in the world.
Given its businesses, NextEra is very well-positioned to benefit from the renewable energy and electric-vehicle revolutions.
Earlier in the year, the company said that it would have to delay a significant amount of its solar tariffs. The announcement followed the news of an investigation of some solar equipment imports launched by the government.
That issue should not be much of a problem for NextEra given that President Joe Biden waived additional solar tariffs for two years.
Since the end of December, NEE stock has sunk about 17%. Its forward price-earnings ratio of 25 is reasonable given its 2.25% dividend yield and its strong growth outlook.
Like Deere, Caterpillar (NYSE:CAT) sells equipment to farmers and should get a lift from high food prices.
Caterpillar will be hurt by a likely significant slowdown in the residential real estate market (due to rising interest rates). Similarly, the slowdown of the commercial real estate market (as a result of of the work-from-home trend), may take a bite.
Its positive catalysts will more than offset those weaknesses, though. Additionally, with CAT stock trading at a forward price-earnings ratio of 15 and a price-sales ratio of only two, its current valuation more than bakes-in those weaknesses.
CAT stock has fallen more than 15% in the past month, and the shares now have a sizeable 2.44% dividend yield.
General Motors (GM)
I’ve long been very bullish on General Motors (NYSE:GM) stock. It has opportunities in EVs, tremendous potential in its autonomous-driving subsidiary, Cruise and a low valuation.
My upbeat column on GM in July 2021, in which I called the name tremendously undervalued has not aged well, as the shares have tumbled about 43% since then.
Nevertheless, based on recent contentions by Barron’s Al Root, I may have just been very early.
Root wrote that “the auto sector is now pricing in a recession—full stop.” He pointed out that GM stock is cheaper now than it was through the depths of the pandemic.
Meanwhile, the company’s Cruise subsidiary, which creates autonomous vehicles, recently took a major step forward by offering paid rides in driverless vehicles for the first time.
Illumina (NASDAQ:ILMN) makes products that enable companies to create treatments based on DNA. Its have tumbled more than 50% year to date.
The biggest reason for the decline is the fear that the Fed will raise rates to nosebleed levels, creating major problems for companies like Illumina that lose money. But year-over-year core inflation was actually lower in May than in April.
Another, related reason for the decline of ILMN stock was likely the 41% year-over-year tumble in the company’s EPS last quarter, but that loss was caused by its subsidiary, GRAIL.
GRAIL’s multi-cancer blood test is poised to become a huge profit center once it’s widely launched.
Finally, Illumina’s CFO, Sam Samad, apparently scared investors by resigning to take the same job at Quest Diagnostics (NYSE:DGX). But Quest is significantly larger than Illumina, and a CFO taking the same position at a much larger company is not a reason to be concerned.
On the date of publication, Larry Ramer owned shares of ILMN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.