Stocks such as those included on this list are ideal for investors to earn a nice margin of safety in a tumultuous market. One of the strategies used to find these stocks is to screen for stocks with the lowest price/ earnings ratio. Here’s a screening of the S&P 500 index using FactSet data for 10 companies with the lowest P/E ratios, using 2022 projected earnings.
These 10 stocks currently trade for bottom-of-the-barrel valuations of five times earnings or less- against the index’s P/E multiple of around 17.
The list includes industry leaders like steel company, Nucor (ticker: NUE), D.R Horton (ticker: DHR) and Lennar (ticker: LEN) in homebuilding, General Motors (ticker: GM) in autos, Moderna (ticker: MRNA) in biotechnology, Mosaic (ticker: MOS) and CF Industries Holdings (ticker: CF) in fertilizer, Viatris (ticker: VTRS), PulteGroup (ticker: PHM), and APA (ticker: APA).
There are two common threads linking most of these stocks. The first is that investors seem reluctant to believe that elevated current earnings will persist into 2023 and 2024. The second thing is that almost all of these companies have strong balance sheets, which might help mitigate the downside risk.
Homebuilders make up three of the 10 stocks. The group has faced severe headwinds in 2022, with Horton and Lennar down more than 35%. There’s fear that robust conditions in the housing market will worsen heading into 2023, as a result of a two-percentage-point increase in mortgage rates this year, to more than 5% and drastically increased home prices over the past two years.
Housing expert Stephen Kim of Evercore ISI said, “the setup is particularly intriguing because these homebuilding stocks are valued as like the industry’s demise is a foregone conclusion.”
Horner, Lennar, and Pulte all trade for roughly four times their projected 2022 earnings, with Lennar landing at around $75, receiving only a small premium to book value. Lennar’s superclass B shares (LEN/ B) are cheaper, at $63. Industry balance sheets have never looked better, and companies like Pulte are organizing stock buybacks.
At around $137, Moderna shares have dropped 70% from their peak of almost $500 last year and trade for a little over five times projected 2022 earnings of roughly $28 a share.
Investors are concerned that Covid vaccine sales, which made up almost all of Moderna’s revenue, will drop considerably in 2023, resulting in earnings collapse to around $9 a share. Despite this fear, the company is developing a raft of new drugs that could see the situation turn around. The downside could be limited, especially since Moderna is sitting on $19 billion of cash, or roughly $47 a share.
GM currently offers a wonderful opportunity since the stock, currently valued at around $36, is a cheap avenue into the company’s ambitious plans for electric vehicles. GM is valued at roughly five times projected 2022 earnings.
The largest steel producer in North America, Nucor, has significantly benefited from the surge in steel prices over the past 18 months. However, investors seem concerned that steel prices, now roughly $1200 a ton, will eventually drop to below $1000 later this year. A bit of that concern has shown up in the company’s share price, which stands at around $125, down from a recent high of $188.
Curt Woodworth, a Credit Suisse analyst, chose to maintain his Outperform rating and a share price target of $165; however, he’s not thrilled by Nucor’s pricey recent deal for CHI Overhead Doors, a maker of garage doors. He added that Nucor’s inexpensive stock is better valued than the $3 billion CHI deal.
Fertilizer stocks have been lifted on the strong bet that investors fear won’t persist. As a result, Mosaic and CF industries trade for four times the estimated 2022 earnings. JP Morgan analyst Jeff Zekauskas says Mosaic is one of “the most inexpensive of the agricultural companies.”
He has a price target of $80 against a recent price of $61. The company is definitely benefiting from high potash prices due in part to restricted supply from Russia and Belarus.
APA produces oil (roughly half its output) and natural gas both in the U.S and internationally, including Egypt. Like its peers in the industry, APA has been boosting its capital returns
to shareholders, although the company seems to prefer stock buybacks over dividends.
Arun Jayaram, a JP Morgan analyst, favours APA, citing a roughly 20% free cash flow yield, and has a price target of $56, compared with the recent price of $43.
The generic drugmaker, Viatris, is as cheap as cheap stocks with potential go. Even though it hasn’t translated into solid returns for investors due to hard industry conditions and has a sizable amount of debt, the stock still has potential.