The S&P 500's Cheapest Stocks

The S&P 500 (SNPINDEX: ^GSPC  ) hit new all-time record highs on Friday, bolstered by strong earnings news and investors jumping headfirst into the market. But even after the big run-up in the S&P 500, some of its component stocks still look cheap. Are they smart buys for your portfolio, or are they value traps that will hurt your overall returns?

Using earnings multiples as a proxy for value has its dangers, especially given the accounting tricks that are often involved in calculating earnings. To remove that potential problem, let's take a look at the 10 cheapest stocks in the S&P 500 on a forward earnings estimate basis, according to S&P Capital IQ.

Stock

Forward P/E

Hewlett-Packard

6.47

Micron Technology (NASDAQ: MU  )

7.57

Delta Air Lines (NYSE: DAL  )

8.03

Ensco

8.13

Goodyear Tire & Rubber

8.31

Western Digital (NASDAQ: WDC  )

8.80

MetLife

8.89

General Motors (NYSE: GM  )

8.94

Lincoln National

9.03

JPMorgan Chase

9.17

Source: S&P Capital IQ.

The technology front has been a fertile place to look at for value stocks lately, but investors have to be careful. You'll find plenty of turnaround stories in the mix, with companies like HP facing an uncertain future as they try to adapt to a rapidly changing world in which PCs are giving way to mobile devices at an alarming rate.

For Micron Technology, though, that revolution is already helping its business. The memory-chip maker has seen a huge jump in demand for its products thanks to the popularity of mobile devices, many of which include its mobile DRAM chip offerings. Micron's recent acquisition of Elpida should boost its market share in mobile even further, and rising demand for flash memory and solid-state drives will give Micron Technology another important source of growth.

Western Digital finds itself in a somewhat trickier situation. On one hand, its legacy hard-disk drive business is under siege from the use of solid-state drives in mobile devices. Yet Western Digital has also benefited from the jump in demand for large-scale storage devices to assist in high-volume enterprise data analysis, and the company has provided cost-effective solutions like hybrid solid-state drives through Western Digital's partnership with SanDisk to give customers the best of both worlds. If Western Digital can keep itself relevant as the mobile revolution progresses, it should be able to weather the storm and survive the transition.

Flying high and driving higher
Delta Air Lines has been one of the most successful airlines at cashing in on the ancillary-fee boom. Delta isn't striving for huge growth but rather has aimed at making the most of its existing opportunities, cutting costs and boosting baggage fees and other income. Attention to details like picking up unwanted planes from competitors on the cheap and focusing on key competitors' hub markets have greatly improved profits. It's uncertain how much further the airline industry can boost profits, but Delta is making the most of the strong conditions in the industry as long as it can.

General Motors has posted its own impressive recovery since its bankruptcy and the U.S. recession, as overall auto sales have climbed dramatically. Some believe that General Motors' pace of growth is unsustainable, though, keeping the stock price down with their pessimism even as net income has risen. Yet there's still plenty of potential pent-up demand among longtime vehicle owners, given that the average vehicle age has climbed to 11.4 years. Combine that with more efficient operations that have included substantial cost-cutting, and it's reasonable to expect General Motors to stay healthy even with recent gains.

Invest in good value
Low P/E stocks aren't automatically smart buys. But they're a good place to start looking, especially for nervous investors who fear a pullback from the S&P 500's record highs.

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  • Report this Comment On October 20, 2013, at 7:45 AM, PEStudent wrote:

    "If you aren't investing yet, what are you waiting for? ... In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started."

    Don't be fooled in thinking that you can read one short brochure or booklet -especially one tied to a commercial enterprise- and then know how to invest. Read at least one book, like Peter Lynch's "One Up One Wall Street" or the slightly more advanced Mary Buffett's "Buffettology" before deciding how to pick stocks. There are also books that describe the pluses and minuses of investing in stocks including various sectors, bonds, mutual funds, ETF's, etc.

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