With the S&P 500 index stunningly back to its winning ways, it may be time to get on the bandwagon but with bargain stocks with potential. In other words, these enterprises presently lag the benchmark on a year-to-date basis. However, they could offer better bang for the buck over the intermediate to long term.
First, while the broader equities space has responded positively to strong holiday sales, it’s not entirely clear that the underlying consumer base can keep up the spending. For example, inflation remains stubbornly high while borrowing costs are elevated against prior norms. Therefore, it may be sensible to consider bargain stocks over already-hyped entities.
Second, major companies that are lagging the benchmark index offer a sensible starting point for stocks with potential for upside. Unlike other businesses, the securities mentioned below are part of the S&P 500. Therefore, red ink may have a better chance of turning black rather than a darker shade of crimson.
On that note, check out these compelling bargain stocks with potential.
Nike (NKE)
According to Wall Street analysts, athletic apparel and equipment manufacturer Nike (NYSE:NKE) carries a moderate buy view. This assessment breaks down as 18 buys, 12 holds and zero sells. Overall, the average price target lands at $118.08, which is admittedly modest. However, the high-side target hits $150, which may give cautious speculators hope for a robust upside.
Looking at the financials, the $150 target isn’t something pulled out of a dark cavernous place. Despite the risks associated with the consumer discretionary sector, Nike has proven resilient. Yes, its total revenue slipped for its fiscal year ended May 2020 against the prior year. However, since then, it has consistently increased the top line.
Just as importantly, the company’s gross profit margin remains stable. In the quarter ended August 2023, this metric hit 44.21%, basically in line with the prior year’s result. Also, the long-term average stands around 44% to 45%. That implies Nike benefits from pricing power, making NKE one of the bargain stocks with potential.
Northrop Grumman (NOC)
An aeronautics and defense company, Northrop Grumman (NYSE:NOC) has been disappointing relative to the benchmark index. Since the start of the year, NOC is firmly in negative territory. However, analysts remain cautiously optimistic, pegging it a moderate buy. This assessment breaks down as seven buys, four holds and one sell. Overall, the average price target comes out to $500.17.
To be sure, that’s not a whole lot. However, the most optimistic analyst – Bank of America Securities’ Ronald Epstein – sees NOC hitting $615. If so, acquiring shares now would make it one of the compelling bargain stocks with potential. Fundamentally, the catalyst centers on the geopolitical tensions that have erupted in Eastern Europe and more recently, the Middle East.
Part of the bullish tale involves the losing of naïve arguments. With the world spiraling out of control, the U.S. simply needs to restore order. That’s a plus for Northrop Grumman. Also, company sales have witnessed a conspicuous spike in 2022 and in the trailing-12-month (TTM) period, aligning with the aforementioned flashpoints.
Public Storage (PSA)
One of the biggest names in, well, public storage facilities, the aptly named Public Storage (NYSE:PSA) offers arguably permanent relevance. After all, irrespective of outside conditions, everyone finds themselves in need of extra storage. However, while the S&P 500 is enjoying solid double-digit returns, PSA sits in negative territory. Still, that could change according to the Street’s experts.
Right now, analysts rate PSA a consensus strong buy. This assessment breaks down as seven buys, two holds, and no sells. Overall, the average price target lands at $292.44. That’s an okay return over the next 12 months. However, the max price target comes in at $330, which symbolizes a very solid performance. Fundamentally, it’s not out of the question.
First, as I stated earlier, we all need storage at some point in our lives. Second and more importantly, the blistering costs of living (here and abroad) have forced many folks to downsize. Therefore, putting away bulky stuff that doesn’t see regular use could result in greater demand for PSA. I see it as one of the bargain stocks with potential.
Johnson & Johnson (JNJ)
A pharmaceutical and medical technologies giant, Johnson & Johnson (NYSE:JNJ) usually offers a reliable platform for positive returns. I anticipate a return to normal programming given the recent uptick in momentum for JNJ. But in the meantime, yeah, it noticeably lags the S&P 500. For some, that’s bad news. For others, it’s one of the underappreciated bargain stocks with potential.
Let’s check in with the analysts first. Currently, they peg JNJ as a consensus moderate buy with a $177.45 average price target. That’s a decent potential return because you’re also getting a dividend yield of 2.97% with a reasonable payout ratio of 44.8%. Further, the high-side target clocks in at $215, which comes from Cantor Fitzgerald’s Louise Chen.
Fundamentally, J&J symbolizes an insulated investment idea in that pharmaceuticals and medical tech don’t necessarily correlate with broader market and economic performances. Basically, when you need such innovations, you try to get them irrespective of the costs. Also, JNJ offers great value, trading at trailing-year earnings multiple of 11.76x, below the sector median of 23.42x.
Philip Morris (PM)
Controversial for its tobacco business, Philip Morris (NYSE:PM) nevertheless deserves consideration for bargain stocks with potential. First, it meets the qualifications. It’s one of the S&P 500 companies yet it underperforms the benchmark index with a negative return this year. However, analysts remain hopeful about PM, rating it a consensus moderate buy with a $107.59 price target.
As I mentioned with J&J above, that’s a decent upside prospect because you’ve got to take into account the dividend. At 5.43%, that’s a strong rate of passive income, though you must watch the high payout ratio of 84.54%. Adding to the bullish sentiment, the maximum price target comes in at $120. That’s courtesy of TD Cowen’s Vivien Azer.
Fundamentally, I believe it’s a reasonable forecast. Yes, global smoking prevalence has declined over the past several years. However, in many countries, the prevalence either did not change or it actually increased. More importantly, Philip Morris develops heat-not-burn products and other alternative devices that appeal to tobacco aficionados.
And it’s a consistently profitable enterprise, warranting a second look despite the controversy.
Exxon Mobil (XOM)
Another somewhat controversial idea for bargain stocks with potential, Exxon Mobil (NYSE:XOM) doesn’t exactly put a smile on everyone’s faces due to the underlying big oil business. Plus, forward-looking relevance concerns exist as people shift their mobility to the electric platform. So, it’s definitely an underperformer to the S&P 500.
Still, Exxon Mobil deserves another look in my opinion. For starters, analysts peg XOM as a consensus strong buy with an average price target of $131. That’s a solid return during any market cycle. Additionally, the company features a dividend yield of 3.57% along with a low (sustainable) payout ratio of 35.24%.
Fundamentally, hydrocarbons are likely here to stay for the long haul. Fundamentally, very few energy sources command the energy density of fossil fuels. Additionally, population expansion and possibly worsening geopolitical tensions should shift emphasis toward energy diversification rather than complete transitions. Aside from an understandable blip in 2020, Exxon has been consistently profitable over the past several years.
General Motors (GM)
Perhaps the riskiest idea on this list of bargain stocks with potential, automaker General Motors (NYSE:GM) should not be entered into lightly. Following a relatively brief but painful labor union dispute, General Motors has the unenviable task of restoring investor confidence. However, in recent sessions, GM stock has demonstrated significant signs of life.
Certainly, analysts remain optimistic about the auto giant, pegging shares a consensus moderate buy. Overall, their average price target stands at $45.33. Further, the high-side target is much more aggressive at $90. That’s a recent late-November call by Citi’s Itay Michaeli. Fundamentally, the company’s concerted effort to pivot to electric vehicles should pay off handsomely. After all, GM benefits from several iconic brands that it can pivot toward electric mobility.
However, it’s not giving up entirely on its racing heritage, as evidenced by the company’s eighth-generation Corvette. This car pumps out a mid-engine confirmation V8, which is unheard of at the price point GM is offering it. That should bring some excitement to the table. Finally, GM trades for a lowly forward earnings multiple of 4.81x. If you want to speculate on the blue chips, GM could be it.
On the date of publication, Josh Enomoto 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.
