The market has been gloomy lately due to so-so macroeconomic reports, low expectations for earnings season, and typical Mr. Market moodiness. As usual, these are short-term trends that should barely factor into your analysis. The good thing is that the broad sell-offs are great for finding some quick value picks. Whether you believe we are walking off the fiscal cliff or you love the government money-printing, you could buy the stocks below at a discount and then sit back while everyone else argues.
The market looks cheap
In general, I am not a fan of trying to determine whether the market at large is cheap, expensive, or anything in between. Top-down modeling just seems too broad for my taste. But every once in a while, it's nice to put things in perspective. Judging by recent history, the markets are looking quite favorable. Back in 2007, before the dive, the Dow was riding high around 14,000, with average trailing P/Es between 17 and 18 and forward earnings around 16. Recently, the Dow has been flirting with 14,000, but multiples look quite a bit lower -- around 12 times trailing earnings and 11 times forward.
There are probably a few theories to explain why stocks look cheaper on an earnings basis, but I'll leave that to the economists. Personally, I'm satisfied with cheaper stocks that are within my strike range for a value buy. Be careful, though; just because stocks are cheap on average doesn't mean you can get everything for a bargain.
Mega caps sitting low
For those of you who agree with the above but aren't quite ready to dive into the deep end of the value pool, let's take a look at some familiar companies with limited volatility that are trading light in the earnings department.
CVS (CVS -1.07%) comes to mind immediately for me. The company has been at the head of its class for the better part of a decade. Revenue has grown nearly 400%, and the company recently reported profits 16% higher than in the year before, so the growth spurt isn't quite over. On a forward basis, the company trades at 12.4 times earnings. Compare that with 2007, when it was trading closer to 22 times earnings. The business hasn't eroded in any material way; in fact, since 2007, Berkshire Hathaway bought more than seven million shares -- one of its more profitable positions in recent times.
Investors can get in on CVS -- a sustainable, profitable business that is without doubt a market leader -- for far less than its historical average. You don't even have to worry about who wins the election; this company is built for the long run.
For the brave
Now, if mega caps bore you (I yawned), there are some more interesting value plays out there that should be of interest.
Many wish they could have bought in on the aforementioned Berkshire Hathaway in the 70s or 80s -- and, of course, in the 60s, in which case one would have earned 1,000%-plus returns. Well, this sort of investment is more attainable than you may think. Take a look at Leucadia (JEF 0.02%), a perennial favorite of mine. Now, buying Leucadia as a value investment is kind of cheating, because the company itself claims to make deep-value investments. Often called the "Mini Berkshire Hathaway," Leucadia has compounded annual growth by 19.1% since 1979. The chief investors behind the scenes collectively own 24% of the common stock, so you can be sure they're on your side. While the stock hasn't done much this year, it still trades below book value -- around $0.92 on the dollar.
Deep value typically includes a long investment horizon. Investors need to give the holdings time to turn around, gain value, or realize whatever the investment thesis predicts. So, while Leucadia might be a lackluster investment right now, it could pay off a little way down the road. The company is well-diversified, with holdings ranging from meat-processing plants to vineyards to investment banks.
For the ill-advised
I mentioned earlier that this broad market cheapness is not all-encompassing. There are, as always, plenty of stocks trading too high for my taste. Take a company I really like, for example: Chipotle Mexican Grill (CMG 0.40%). There is little doubt that Chipotle is a well-run organization with a sticky product and decent growth prospects. But at its current valuations, even after a recent sell-off, I just can't bring myself to buy. The company trades at nearly 27 times forward earnings. Few restaurants, if any, could ever warrant such a premium. And with the concerns recently raised by short-seller extraordinaire David Einhorn, the risk-to-reward ratio just doesn't seem right.
Some investors bought into the Chipotle dip (I don't mean the guac) thinking they got themselves a steal. Sure, there might be a rebound if the company delivers a nice earnings report this week, but if you are looking to hold for the long term, I just don't see how the stock can deliver any meaningful capital appreciation to shareholders.
Grab your shopping cart
There are plenty more stocks that are trading at a discount to their intrinsic value. Go run a screen for low P/Es, low P/Bs, or any ratio of your choice, and I bet you'll see some familiar names trading lower than you would have expected. But always do your homework; the market does try to live up to its image of efficiency -- even if it misses some here and there.
