Uncertainty reigns on Wall Street. And with this season’s quarterly earnings just about behind us and a very quiet few weeks between now and the end of the year, it’s unlikely that’s going to change.
Still, the S&P 500 Index SPX, +0.22% isn’t exactly falling apart. The benchmark index is now little changed this year. And it’s also worth noting that big-picture metrics remain robust — the third-quarter estimate for U.S. GDP growth coming in at 3.5%, and quarterly earnings showing a blended growth rate of about 25% — the second-highest pace in eight years, according to FactSet.
That indicates it would be a rash move to throw your portfolio out the window and hide in cash. And as the saying goes, the time to be greedy is when other people are fearful — and you can enter a long-term position for a bargain, thanks to short-term declines. Everyone loves a bargain, especially this time of year, with Black Friday shopping right around the corner.
Here are five stocks that look fairly valued when compared with the broader S&P 500, and offer decent income potential to boot.
Ford
Ford F, -2.79% was the only Big Three U.S. auto maker to avoid bankruptcy during the financial crisis, and had been thought of as more attractive than its peers. However, Ford has struggled mightily in recent years. The problems: A drop in U.S. car ownership as millennials live urban and take Uber, and fading Asia sales and an aging vehicle portfolio.
But while Ford stock may never blow your hair back with disruption and massive growth, it is arguably one of the best value plays on the market. The automaker trades at just over seven times next year’s earnings and a paltry 0.24 time revenue. Sure, both profits and sales have flat-lined, but those metrics means investor expectations are very low and even low-single-digit growth would be a win.
Furthermore, with earnings per share (EPS) projected to tally $1.34 this year and annual dividend payments of only 60 cents, Ford’s tremendous 6.4% dividend yield is pretty sustainable. So what if shares go nowhere with a yield like that?
Intel
Though the yield is much lower at just 2.5%, the story of Intel INTC, +1.50% is similar in many ways to Ford. This is a company that has seen big-picture pressures from the decline of PCs and the rise of mobile, as well as specific issues, such as competitor Advanced Micro Devices AMD, -3.86% stealing server market share and that its next-generation 10-nanometer process technology may not deliver as hoped.
However, these are certainly not new items to anyone who has been paying attention. And by some measures, Intel stock has priced in enough negativity to make its shares a pretty decent value play.
Case in point: The stock trades for about 10 times next year’s earnings, about a third of AMD’s valuation and well under the forward P/E of about 17 for Texas Instruments TXN, -0.11% Intel also trades for about three times total sales, compared with almost five times sales for Broadcom AVGO, +0.54% and almost six times sales for Texas Instruments TXN, -0.11%
With over $14 billion in cash and short-term investments on top of over $22 billion in annual operating cash flow, Intel is well-capitalized and had a broad enough reach to weather any short-term pain. And with shares up more than 10% from their 52-week low in October, there are signs that the worst of Wall Street’s negativity is now behind this stock. For another boost, Intel said Thursday that it approved a $15 billion buyback program. (Intel had $4.7 billion remaining under an existing repurchase program as of Sept. 29.)
IBM
With the next generation of high-tech growth stocks blazing a trail, investors tend to turn pretty fast on the old guard. That’s the unfortunate reality for IBM IBM, +0.11% which has been punished in the last several weeks after another round of problems with the top line hinted to some that Big Blue will keep falling behind.
But while October earnings showed revenue challenges yet again, third-quarter numbers are traditionally weak for IBM. Furthermore, negative perceptions about IBM’s growth trajectory have persisted pretty much since 2014, and are now very much priced into shares; IBM trades for a forward P/E ratio of less than nine and a price/sales of about 1.3. Those are well under the typical valuation metrics for a tech stock.
IBM also offers up a tremendous dividend of 5.1%, and the $6.28 in annual payouts per share is less than half the projected earnings of about $13.80 this year. That leaves plenty of room to tackle short-term challenges and keep investing in high-growth areas like its Watson AI or big-ticket acquisitions like the recent deal for Red Hat RHT, -0.18% without threatening its dividends.
Citigroup
In the wake of the financial crisis, Citigroup Inc. C, +0.54% was left with plenty of brand tarnish. It took such a beating that its shares dipped below $1 apiece during the depths of the bear market in 2009. Thanks to the recovery and a 10-for-1 stock split, Citi stock has come back significantly since then. But it remains a chronic underperformer, with the stock down about 10% in the past 12 months vs. a 5% gain for the S&P 500 and a 2% increase for the Financial Select Sector SPDR ETF XLF, +0.11%
However, investors may want to give Citi a look because of its rock-bottom valuation metrics. The mega-bank trades for a 10% discount to its book value, about 2.4 times sales and at a forward P/E of less than nine. Compare that with leading bank J.P. Morgan Chase JPM, -0.07% that trades for a 50% premium to book value, 3.5 times sales and a forward P/E of about 11.
Bigger picture: Rising rates should help net interest margins for all financials — as should recent corporate tax cuts and regulatory reforms from Republicans that won’t be undone as the GOP has held the Senate and Trump remains in the White House. And specific to Citigroup stock, the bank beat expectations in October and reported a surprising jump in lending and deposits that hint the bank may be righting the ship on its consumer-facing businesses.
BP
Energy stocks naturally come with the risk of short-term volatility, but Big Oil behemoth BP BP, -0.78% is starting to look like a good long-term play based on current metrics. Sure, it took a nearly 15% dive in October and the beginning of November as oil prices softened and as a choppy market took its toll. But it remains well-positioned for the long term, despite continued investor negativity.
On the valuation front, BP has a forward P/E of less than 11 and trades for just under 0.5 time next year’s revenue projections. That’s not just cheaper than the typical S&P 500 stock, but also cheaper than many peers; Exxon Mobil XOM, +0.98% boasts a forward P/E of more than 13, while Chevron CVX, +1.80% is more than 12, and both energy giants actually trade for a modest premium to sales instead of a discount like BP.
But you have to wonder how much BP is still being penalized for the sins of the past. The 2010 Deepwater Horizon resulted in penalties of $65 billion, but settlements are largely wrapped up as the company enters 2019 with a pretty clean slate. Furthermore, being domiciled in the U.K. may help BP stay out of America’s recent diplomatic tensions with Russia and China, two key exploration markets for oil and gas.
In the near term, there are many factors that may affect the price of oil. But BP earnings are solid — and with a projected $3.65 in EPS and just $2.46 in annual dividends, the juicy 6% yield is pretty solid too.
