Beware of Cheap Stocks

It sounds like the mother of all investing opportunities. According to Andrew Bary's column in Barron's over the weekend, the S&P 500 is trading at just 12 times forward earnings. That's the lowest multiple that we've seen in more than 20 years.

He then takes his analysis one step further, pointing out that a little more than half of the 25 largest companies that make up the popular index are trading at or below 10 times next year's projected profitability.

I was excited, too. Then I checked out the list of Wall Street's bargains. Yikes. These aren't blue chips. Some of these are black and blue chips. Let's go over a few of these cheapies that may not be as inexpensive as they seem to be.

Sources: Barron's, Yahoo! Finance.

Wait until next year
This would have probably been a killer portfolio a generation ago, but I can't be the only one concerned about the prospects of these companies -- and, in some cases, their respective industries -- for the future.

Let's break it down. ExxonMobil is the country's most valuable company in terms of market cap, but how confident are you that oil consumption will continue to grow? Yes, globally it's inevitable as emerging markets grow. However, as drivers trade in their gas guzzlers for fuel-efficient hybrids and eventually zero-emission electric cars, the days are numbered in which ExxonMobil commands a greater valuation than silver medalist Apple (Nasdaq: AAPL). Other components of ExxonMobil's business will hold up better, but what I see today isn't a very compelling snapshot.

Apple passed Microsoft for the No. 2 market-cap spot earlier this year, but it had better not take its bronze medal for granted. We live in changing times. Mr. Softy feasts on the high margins of its Windows and Office franchises, but is this really the future? Rival and open-source platforms are nibbling in the low-end netbook and tablet space. Free Web-based application suites make more sense as connectivity becomes ubiquitous.

AT&T is the telco that's perpetually blasted for its wireless coverage, toiling away in the landline graveyard, and trying to sway couch potatoes to switch to its U-verse platform. It's widely believed that AT&T's exclusivity with Apple's iPhone ends next year, opening up the floodgates of frustrated defectors to rival carriers. Broadband connectivity will only grow more commoditized.

JPMorgan Chase and Bank of America carry dirt-cheap multiples, but how will their businesses hold up on the other side of financial reform? Investment banking, lending, and even the easy trading profits of today are likely to be curbed in the future.

Major pharmaceuticals have gone from all-weather investments to weathered over the years. It's all about the ticking clocks that push marquee drugs into the off-patent generic cesspool, and recent challenges for Pfizer and its peers to keep the development pipeline of new potential blockbusters flowing.

Here's the rub
Despite the threats, analysts believe that all six of these companies will post higher earnings in fiscal 2011.

How will these valuations stack up when cold feet start to get icy? Over the past three months, analysts have hosed down Pfizer's bottom-line target. Wall Street is now braced for a profit of $2.26 a share next year, short of the $2.32 a share it predicted in April. Similar markdowns have happened for ExxonMobil and Bank of America.

Next year's estimates appear to discount an economic recovery and assume that the market leaders of the last turnaround will be the same winners this time. I'm not comfortable with either of those wagers.

These stocks won't seem all that cheap if they ultimately wind up earning far less than analysts project from their blurry, faraway perspectives. Be careful out there.

Are any of these six stocks bargains in your opinion? Counter Rick's arguments in the comments box below.