This article was originally published on this site
“Price is what you pay. Value is what you get.” — Warren Buffett
Few would debate that the “price” of U.S. stocks isn’t pretty high right now — but where are the values in this overheated market? As a whole, the S&P 500 sports a 25.5 P/E ratio today, which is well above historical norms. But does this mean that all stocks are expensive?
Not necessarily, no. In fact, just the other day I ran a stock screener, searching the NYSE for large-cap, blue chip companies. Focusing on the 12 cheapest stocks on the list — the “dirty dozen” of deep value bargains — I’ve selected three names for you to consider, any (or all) of which might make for a great investment.
Here they are for your review: 3 of the lowest P/E stocks today.
The biggest name on this list, and the cheapest too, is none other than General Motors (NYSE:GM). GM probably needs no introduction, but just to be safe, here are a few quick stats for you:
Based on full-year 2016 car and truck sales, General Motors is now the third largest carmaker in the world after Volkswagen and Toyota. Last year, GM moved 9.6 million automobiles off the lot, 3% fewer than in 2015, which seems to confirm that the car market has peaked for the time being. But “peak” may be a relative term: In May, GM’s sales declined just 1.3% against May 2016 numbers. And in March GM’s sales were actually up year over year. So while it seems clear the automotive market isn’t growing as rapidly as it once was, the situation has hardly hit doomsday levels.
Given this fact — and given that most analysts who follow GM stock believe it’s capable of growing earnings at a respectable 8% annually over the next five years — GM’s current valuation of just 5.4 times earnings seems pretty conservative. With an 8% growth rate and a 4.3% dividend yield, I think a lot of risk has been priced into GM stock already, and it could make for a good buy at today’s prices.
At 8.5 times earnings, Canada’s Magna International (NYSE:MGA) seems at first glance both a more expensive way to play the auto market than GM, and a less well-known company to boot — but Magna is a company worth getting to know. John Rosevear, senior auto specialist for The Motley Fool, calls Magna “the world’s only high-quality contract auto manufacturer.” That basically means that in addition to supplying automotive parts to other carmakers, Magna also has the ability to build entire cars for other companies to sell as their own.
Which companies, you ask? Porsche, Mercedes-Benz, BMW, and Aston Martin have all been known to make use of Magna’s services as a contract manufacturer. Most recently, Magna announced it has the contract to build BMW’s new 530e plug-in hybrid, and Jaguar’s new “I-PACE” all-electric SUV as well.
Yet for such an in-demand company, Magna International stock sports a very reasonable price. The P/E, as already mentioned, is only 8.5. And even adjusted for debt, the stock sports an enterprise value of only $19.5 billion — roughly 9 times its trailing earnings. Given that analysts see Magna growing its earnings at 11% annually, and given that the stock pays a market-beating 2.4% dividend yield, I think Magna stock’s price is more than fair. It may be one of the lowest P/E stocks today, but I don’t think it will remain so for long.
Finally, shifting gears out of automotive stocks and into the world of pharmaceuticals, we come to McKesson Corporation (NYSE:MCK). McKesson distributes drugs (no, the good kinds), wholesaling pharmaceuticals to pharmacies at CVS, Wal-Mart, and even the Department of Defense for later sale to consumers.
This is a growing business that saw sales rise 4% in the most recent quarter, and analysts expect McKesson to grow earnings at about 8% annually over the next five years. Yet McKesson’s low P/E may not fully reflect these growth prospects (nor the value of the company’s modest 0.7% dividend yield). McKesson stock sells for just 7.2 times trailing earnings, which seems ridiculously cheap for a stock offering an 8.7% total return (from dividends plus earnings growth).
Viewed in the most critical light, I calculate that McKesson has an enterprise value of 9.4 times free cash flow after factoring in its net debt. From that perspective, valued on its free cash flow, the stock doesn’t look as deeply discounted as it does when valued on earnings — but it’s still far from expensive.
Still, I’d counsel waiting for at least a modest pullback before buying into McKesson — if only because the bargains are so much greater at General Motors and Magna International.