5 Good Stocks to Buy While They Are Cheap
Even after kicking off the new year with a 6% slide in the first week of trading, the stock market doesn’t look cheap. Corporate profits have been slumping over the past few quarters, and Wall Street earnings estimates are falling—keeping a lid on the market’s price-earnings ratio. Companies in Standard & Poor’s 500-stock index on average trade at 15 times estimated 2016 earnings. That means investors are paying $15 for a dollar of profits, only slightly below the 25-year average, according to J.P. Morgan.
See Also: 26 Best Stocks for 2016
Yet plenty of big-name stocks trade well below the average P/E. These aren’t battered oil drillers or mining companies whose only hope of a rebound is a recovery in prices of energy or raw materials. Some healthy biotechnology, financial and technology firms have P/Es in the low double digits, in many cases below 10. Even a few stocks in the energy patch look like bargains—and don’t need a recovery in oil prices to lift their fortunes.
Start with the biggest and best-known company on the planet, Apple (symbol AAPL, $99.96). Off from its record high of $133, set in February 2015, the stock’s P/E has dipped to 10. That’s 15% above its five-year low, according to UBS analyst Steve Milunovich. Yet Apple’s P/E, about one-third less than the market average, now matches the low point from the spring of 2013, just after Apple slashed iPhone 5 orders by 40%. In hindsight, that proved to be a terrific buying opportunity. (Returns, share prices and related figures are as of January 12.)
Today, investors worry that demand for iPhones—a product that accounts for almost two-thirds of Apple’s revenue—isn’t matching analysts’ forecasts. The company has slashed factory orders for its latest iPhone models, according to reports, partly because people aren’t upgrading older phones as quickly as anticipated. Some analysts believe Apple sold fewer iPhones in the fourth quarter of 2015 than it did in the same period of 2014, when Apple sold a record 74.5 million phones. Sales of iPads continue to slide, and new products, such as the iWatch, aren’t big enough to move Apple’s titanic sales: $233.7 billion in the fiscal year that ended in September 2015.
The bullish case for Apple is that it is experiencing a lull that will pass once the company launches its next big phone upgrade, expected this fall. China remains an enormous opportunity—sales rocketed 99%, to $12.5 billion in the quarter that ended last September 26. Overall, Apple isn’t losing its market strength in smartphones, and its “brand and ecosystem have never looked stronger,” says Milunovich, who sees the stock hitting $130 over the next 12 months. Although most investors don’t buy Apple for its dividend, the stock yields 2.1%, about the same as the broad market.
At 8 times estimated 2016 earnings, Gilead Sciences (GILD, $97.10) is remarkably cheap for a biotechnology leader. The stock has slipped 14% over the past six months because of concerns that sales of Gilead’s top-selling products—drugs to treat hepatitis C—are coming up shy of analysts’ forecasts.
Competition for the drugs is heating up, with a rival product from Merck due out in early 2016. Drug makers overall face political pressure to lower prices. And analysts fret that Gilead’s pipeline of products in development isn’t robust enough to spur sales growth. Wall Street sees earnings slumping to $12.06 per share in 2016, from $12.19 in 2015. (See also: Battered Biotech Stocks to Buy Now.)
But RBC Capital Markets analyst Michael Yee advises sticking with the stock. The new Merck product should take 5% to 10% of the hepatitis-drug market in its first year, he estimates. But sales of Gilead’s hepatitis drugs could pick up. Until now, insurance companies mainly covered the drugs for patients with advanced stages of the disease. UnitedHealthcare recently issued new guidelines that authorize one of the drugs for patients who aren’t as sick—opening up about half the market of potential patients. Gilead could also win approval for a new hepatitis C drug combination, potentially boosting sales if the Food and Drug Administration signs off on the combo; a decision is expected in June.
The upshot: Gilead should see earnings climb by 2.5% in 2017, according to Wall Street estimates. That’s hardly exciting growth. But even if the shares hit $130 over the next year—Yee’s price target—they would only fetch 11 times estimated 2017 earnings. The stock yields 1.8%.
Delta Air Lines (DAL, $46.96) trades at a mere 7 times estimated 2016 earnings. Investors fear that fare wars will break out as airlines add more planes to their fleets, pressuring profits across the board. Jet-fuel prices may climb from today’s depressed levels. Labor costs are inching up, and investors worry that profit margins, already under pressure, will continue to slide.
Powerful as these forces are, they may already be baked into Delta’s stock price. Credit Suisse sees the growth of industry seat capacity peaking in the first quarter of 2016. Delta’s revenue per passenger mile (a key airline measure of efficiency) should turn positive this summer, after slumping 3.3% in 2015. Delta is also buying back stock to boost earnings per share, and the company is using its windfall from low fuel prices to pay down debt, enhancing what was already one of the stronger balance sheets in the business. Although it isn’t the cheapest major airline—United Continental (UAL, $50.86) takes that prize—it looks like the “best in class” stock, says Credit Suisse.