Five Cheap Stocks in a Pricey Market
May 3rd 2011 5:00PM
Updated May 4th 2011 11:36AM
The stock market has been on a tear over the past two years. With the Nasdaq having recently hit a 10-year high, the Russell 2000 at an all-time record, and the S&P 500 hitting multiyear highs repeatedly in recent months, anyone who bought a broad-market index fund during the financial crisis has been laughing all the way to the bank.
But a rising stock market isn't perfect, especially if you have new money to invest. As the market goes up, it gets harder and harder to find stocks that haven't gotten ahead of themselves. Are there any stocks that actually carry attractive prices anymore? Later in this article, I'll give you the names of five stocks that fit the bill even in a booming market.
Trading Two Markets
Unfortunately, this investing environment has largely polarized stocks into two categories. On one side of the fence are companies like Molycorp (MCP) and Silver Wheaton (SLW) , which have cashed in on huge investor interest in commodities. Throughout the market, across hot sectors from energy to mobile computing and smartphones, you'll find lots of stocks that have had their shares bid up to the stratosphere.
On the other hand, plenty of stalwart companies haven't produced impressive performance. Cisco (CSCO) and Microsoft (MSFT), for instance, have plodded along with reasonable results, but it's clear that their highest-growth heydays are over. That has depressed investor interest in their shares, which have fallen significantly in the past year.
The key to finding good yet attractively priced stocks is to avoid both of these categories. Ideally, you want companies that have good growth prospects for the future, but you don't want to pay double or triple what you would've paid two years ago for the same shares.
Finding Needles in the Haystack
I did a simple screen looking for stocks with those attractive attributes. In particular, I wanted relatively low earnings multiples, double-digit future growth estimates, and share prices that hadn't participated in the bull market over the past year. Here are the stocks that topped the list:
5-Year Expected Growth Rate
|Best Buy (BBY)||10.1||10.2%||(30.2%)|
|Bank of New York Mellon (BK)||14.1||12.8%||(5.6%)|
|Gilead Sciences (GILD)||12.2||15.2%||(2.2%)|
|Washington Post Co. (WPO)||14.0||29.4%||(12.1%)|
Source: Yahoo! Finance
These stocks are as eclectic as the overall market, but they share common traits: Each has suffered setbacks recently, but has the strength to get through those setbacks if it starts executing better. For instance, Best Buy has suffered as consumers have disappointed with low sales of high-priced TVs, but it has the ability to cash in on mobile and tablet sales going forward. Bank of New York Mellon may not have the same brand-name loyalty as bigger Wall Street banks, but that could be a positive going forward if it tries to capture disgruntled customers from competitors. Gilead's profits fell as reduced fears of a flu pandemic hurt sales of Tamiflu, but in the long run, the world will face future problems which Gilead will be able to address.
In addition, sometimes even staid companies have more growth potential than you'd think. Whirlpool could benefit as emerging-market consumers improve their standard of living enough to buy entry-level appliances. And despite the problems of the newspaper industry, Washington Post has a diversified set of businesses under its umbrella, including the Kaplan education franchise.
Keep Looking for Cheap
Regardless of how high the stock market goes, you can always find stocks that still have some value left in them. Sometimes you just have to look a bit harder. But by refusing to compromise and demanding stocks with at least the potential for growth to go with decent prices, you'll stand the best chance of avoiding damage in the next market downturn while locking in good long-term prospects for your portfolio in the coming years.