If you’re looking for bargain stocks to buy, one place to start is with companies with low price-to-earnings multiples.
What constitutes low earnings multiple stocks? Well, the S&P 500 has a P/E ratio of 25.5x. According to Finviz.com, 245 of the 503 stocks in the index have a P/E below 25. You could start there.
However, I was looking for undervalued stocks to buy now. And then I came across a Seeking Alpha article about a smaller Canadian bank trading at a very low P/E, and that gave me the idea to look for bargain stocks to buy trading below 7x earnings.
A tweak to the Finviz screen tells me there are 25 stocks in the index with a P/E below 7x. Of those, 15 are in the energy sector. The rest are spread between other sectors, including financials and basic materials.
I’ll choose one of the energy stocks as one of my three picks, with two other bargain stocks to buy from different sectors.
Here goes.
| OXY | Occidental Petroleum | $57.23 |
| PFG | Principal Financial Group | $73.00 |
| PHM | PulteGroup | $74.88 |
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) is one of Warren Buffett’s biggest bets. It took a while for Berkshire Hathaway (NYSE:BRK.B) to make money from the once-struggling oil and gas exploration and production company. However, thanks to rising oil prices over the last 12-18 months, PXY stock has done well for Berkshire shareholders.
Berkshire currently owns 24.9% of Occidental’s stock. The holding company’s sixth-largest holding accounts for 3.6% of Berkshire’s $354 billion equity portfolio.
It might not seem like a lot compared to Apple (NASDAQ:AAPL), which accounts for nearly 48%, but of the 50 Berkshire holdings at the moment, only 13 account for 1% or more of its total, so it’s a big deal.
Berkshire’s most recent purchases of Occidental stock came at the end of May. It purchased approximately $275 million at a weighted average price of $58.57 per share.
As part of Berkshire’s original deal with Occidental in 2019, it got $10 billion in preferred stock paying 8% annual interest and warrants to buy 83.9 million shares at $59.62.
Occidental’s first opportunity to redeem the preferred shares is in 2029, so Buffett still has 5.5 years to exercise the warrants.
Although Berkshire doesn’t want to own the entire company, it is happy to purchase up to 50% of the company. Occidental trades at a low 6.7x earnings.
Principal Financial Group (PFG)
Like many financial services stocks, Principal Financial Group (NASDAQ:PFG) isn’t keeping up with the S&P 500 in 2023. It’s down 26 percentage points relative to the index.
However, its diversified revenue streams provide shareholders with stability regardless of economic circumstances.
In Q1 2023, its business saw a decline of 11% in net revenues to $650.1 million. Revenues were lower due to lower markets affecting both its fee income generated from assets under management and assets under administration and investment income from its assets.
However, if not for an exited business, its revenues in the quarter would have increased by nearly 9% year-over-year. Its net income in the quarter, excluding the exited business, was $346.9 million, slightly higher than $338.7 million a year earlier.
All five segments generated positive operating earnings during the quarter, with the Retirement and Income Solutions business accounting for nearly 47% of its operating profits.
While analysts don’t like it (of the 16 covering it, 10 rate it a “Hold” with six an outright “Sell”) it currently trades at 4.4x earnings, half its five-year average.
PulteGroup (PHM)
PulteGroup (NYSE:PHM) is the only stock of the three that is up in 2023. It’s gained nearly 60% year-to-date and 98% over the past year.
It’s recovered nicely from its June 2022 52-week low of $35.03.
Deutsche Bank analyst Joe Ahlersmeyer believes that despite the run that homebuilder stocks have been on, including Pulte, over the past nine months, there’s still room to move higher.
“With continued improvement in demand fundamentals and book valuations fairly attractive by historical standards, our view is that homebuilder stocks can climb meaningfully higher,” Yahoo Finance reported the analyst’s comments from mid-June. Ahlersmeyer wrote.
Ahlersmeyer argues that Pulte’s double-digit order growth over the next 18 months and higher margins on those orders should lead to significant excess cash.
The analyst has a Buy rating and a $95 target price on its stock.
Despite the significant appreciation of its shares over the past year, it still trades at just 6.4x earnings, less than its five-year average of 8.4x.
There is a shortage of 6.5 million homes in the U.S. (2.3 million if you include multi-family dwellings), suggesting that Pulte will continue to have a backlog that’s more than its annual capacity to build new homes.
That’s a good problem to have.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
