6 Big Winners That Are Still Cheap

Big market rallies are great -- unless you're stuck on the sidelines. But fortunately, even if you've missed out on some of the big gains that stocks have seen in the past year, it's not too late to get in on the action.

Put on your rally caps
After a long pause during much of the year, stocks have returned to rally mode in the past few months. Since the beginning of September, the S&P 500 is up 16% and has reached highs not seen since before the market meltdown two years ago. A combination of rampant pessimism going into the traditionally weak fall season plus the Federal Reserve's emergency measures to inject liquidity into the financial system via quantitative easing arguably forced stock prices higher.

All of that sounds perfect if you have your money in the stock market. But if you've been waiting for clearer signs of an economic recovery before putting your money at risk, stocks that are hitting multiyear highs present you with a dilemma: Is the next bull market just getting started, or have you already missed the biggest gains you're likely to see?

Finding value
The answer to that question is simple: It depends. Specifically, some stocks have indeed gotten to the point where they're overvalued -- perhaps ridiculously so in some cases. Just yesterday, UBS downgraded shares of Las Vegas Sands (NYSE: LVS  ) , citing valuation as a concern after the stock has tripled just since February. At a multiple of 50 times expected earnings for the year, value investors would likely shy away from the casino operator's shares at this point.

On the other hand, some stocks haven't participated in the rally. That may make them seem like perfect candidates for new money -- but before you immediately jump in, you need to find out why they haven't gone up. Often, you'll find fundamental reasons behind a stock that lags behind in an up market. Unless those inherent problems resolve themselves, then a stock's underperformance can continue for a long time, frustrating those who keep waiting for a catalyst to boost their returns.

What you really want are stocks that have participated in the rally but haven't gotten ahead of themselves. That way, you can be reasonably sure there aren't any basic problems with the businesses, but the shares aren't necessarily too toppy.

Room to run
So with that in mind, I went in search of stocks that have both seen strong gains and still trade at reasonable valuations. Here are the best candidates I found:

Stock

52-Week Return

Current P/E Ratio

Ford Motor (NYSE: F  )

91.1%

9.0

Altria Group (NYSE: MO  )

32.8%

14.4

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

25.8%

12.8

SanDisk (Nasdaq: SNDK  )

81.7%

8.2

Veeco Instruments (Nasdaq: VECO  )

71.8%

10.0

TriQuint Semiconductor (Nasdaq: TQNT  )

93.1%

10.4

Source: Motley Fool CAPS.

As you can see, these stocks range from well-known household names to up-and-coming small-cap companies. Ford has not only come back from the dead but sees its success continuing to accelerate with the coming launch of the new Focus. Altria, meanwhile, chugs along with steady results year in and year out, and a knockout-gorgeous dividend yield. And Freeport is riding the wave of higher metals prices, which shows no signs of stopping.

The smaller companies have their own stories. SanDisk is in an essentially commoditized business, but it sports better margins than some of its main competitors. Veeco's exposure to LED lighting and solar energy put it squarely in two exciting industries. And radio chip maker TriQuint has scored success as a supplier for the iPhone and iPad.

It's not too late
Of course, just because these stocks have good prospects doesn't mean they're a sure thing. After a big market rally, there's no telling when the stock market could reverse direction, taking even the best values down with it.

Nevertheless, if you're sitting on the sidelines wondering whether there are any smart investments left, take a closer look at winners that still carry attractive valuations. The margin of safety you gain by sticking with good values can give you the best of both worlds no matter what the market does.

Need more winning ideas? We've got five great ones for you right now. Click here to get The Motley Fool's free report, 5 Stocks the Motley Fool Owns ... and You Should, Too.

Fool contributor Dan Caplinger knows big winners are seldom cheap. He doesn't own shares of the companies mentioned in this article. Ford Motor is a Motley Fool Stock Advisor pick. The Fool owns shares of Altria Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you a big winner.


Read/Post Comments (9) | Recommend This Article (42)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2010, at 2:10 PM, TMFRhino wrote:

    TriQuint's an interesting play, but it's worth noting the P/E is propped up by a pretty decent income tax gain last quarter. A bit on the "artificially cheap" side.

  • Report this Comment On November 11, 2010, at 2:58 PM, mikecart1 wrote:

    Why is MO on that list? I own it and love it but MO is at its highest point ever. How high do you expect it to go?

  • Report this Comment On November 11, 2010, at 7:20 PM, baldheadeddork wrote:

    I'm asking that questions about MO, too. We bought a few hundred shares last summer and have picked up a nice 40% gain and the dividend. But I wouldn't buy more now, and I'm thinking hard about selling before the end of the year.

    But beyond MO, this is a dilemma now with a lot of stocks. There's a piece up today about Sherwin Williams that points out all the reasons it's not overpriced. Those may be correct, but this is still a company with almost 100% of it's business in construction/remodeling at a time when that business is still in a depression. Why should a home paint company be hitting all-time highs now, when their revenues and profits are down significantly compared to two years ago? The only reasons I can imagine is that the current run up is driven by speculation, or the market has decided en masse that SHW was ridiculously undervalued during the biggest housing/commercial construction boom in US history.

    Ford is one that I know well. It's our largest holding and our best performer. I think it's stock price has another $8 to go by this time next year, but I'm also expecting a pullback (swag in the mid-high 12's) thanks to a 40% run up in the last two months. There's way too much money on the table for everyone who owned it from the beginning of the year (or before) to let it ride.

  • Report this Comment On November 11, 2010, at 7:28 PM, misskimberly1 wrote:

    I've been bullish on Ford and even GM for some time now and so its good to get confirmation that my slight obsession on them has been paying off.

    Miss Kimberly - http://canadianprofiteer.com/

  • Report this Comment On November 11, 2010, at 8:28 PM, ashunigam wrote:

    Not sure why every one is worried of LVS rally? This is one of the stock that is truely global and with high 1 year growth potential. It rallied and will continue rallying due to this fact. I won't be surprized if it crosses 65 within a month.

  • Report this Comment On November 11, 2010, at 10:31 PM, Ozcutty wrote:

    Ford is a short term turn around play. Give it another 12 months and get out at the top. Long term vehicle manufacturing is an aweful business

  • Report this Comment On November 19, 2010, at 12:29 PM, bfifaye wrote:

    Regarding Sherwin Williams: Paint is cheap compared to reconstruction or buying new in a difficult housing market. And alot of those people (including me) who can't afford to sell their house for a loss will choose DIY and paint.

  • Report this Comment On November 19, 2010, at 2:05 PM, majac3356 wrote:

    priced a ford truck recently and was told that two large fleets had moved from gm to ford because gm took the bailout money... i think ford will continue to grow for another year and gm will need another bailout in five or so years?

  • Report this Comment On November 20, 2010, at 7:38 PM, aleax wrote:

    @InsiderTrade, of the stocks you list there are only two whose companies I'm deeply familiar with (and I'd never recommend for or against investing in a stock, much less invest in it -- or short it;-) -- myself, without being convinced I'm very knowledgeable about the firm it stands for... reasoning by sectors, screens, or macro considerations are all well and good, but if you invest in specific stocks, the *specific firm* and how well or badly it's run &c is always crucial). I'm *NOT* a qualified investment advisor (if I were, I'd be charging for it;-), but I think I'll share my personal opinions.

    I owned a small position in MU for a while, and recently sold it (for a decent gain of over 10% in a few months, without counting some lucrative call writing I've done on it) at 7.30 -- I'm convinced that's still below fair value (which I would peg at AT LEAST 7.50, and more likely 8+), but I had portfolio reasons to cash my gains (I tend to be overweight in semiconductors, just because it's one of the fields I understand most deeply -- I'm an EE and, even though I've drifted to systems, software, and management, for quite a while now, not actually having designed an integrated circuit myself in MANY years, I do still keep up with what I think of as "my profession";-). I think the company is on track executing its difficult but important strategy of extricating itself from exclusive reliance on memory chips (which will admittedly remain its chief bread and butter for the foreseeable future) with a commendable amount of R&D and capex (so they're NOT stinting on their future to show good quarterly earnings -- they're ploughing their recently-repaired, good quality cash flows mostly in the company's future, as it SHOULD be!). I hope the risks are also obvious -- one out of the company's power to control (no matter how well they execute they COULD still suffer grievously) is exchange rate. If the USD soars, MU, as the sole US supplier of many bread and butter "commodity" chip, might find its markets swamped by huge flows of suddenly-cheap competing chips from Japan, Taiwan, Korea, wherever. From a balanced-portfolio viewpoint, make sure, if you build a substantial position in MU or other firms that will suffer badly from trade-weighed USD appreciation, that you're covered with stocks which will BENEFIT from a soaring dollar (if any), such as foreign companies producing abroad and SELLING a lot in the US -- or, hedge directly in the appropriate amounts, with forex or equivalent ETF exposures (just like, say, a big position in GIS or K _should_ be hedged -- e.g. with commodity futures options or ETFs -- against soaring grains prices, unless you specifically WANT to bet that grains prices won't soar!-).

    Oh my -- this post is getting too long so I need to go into less-verbose mode!-). SLT I've been researching in depth and loving what I see -- THAT one is all about political risks in India, a country with a solid but volatile democracy, which, however, I do feel I know well enough to assess in risk terms.

    Unless Indian politicians go crazy (sometimes they have in the past, esp. at state rather than fed level, but it LOOKS a bit better right now...) and "sabotage" their own crucially needed infrastructure buildup (for which SLT's huge supplies of copper, aluminum and zinc are obviously key), SLT's going to be just great IMNSHO -- intrinsic value no doubt above 20. I've been waiting to grab it below 15 (I started researching AFTER it passed 15, darn!-), but maybe I'm just being too much of a skinflint (sometimes I tend to...!), and getting it below 16 is good enough. Or, selling cash-secured June 2011 15 puts, premium over 1.5 now, might be a sound strategy here (if your broker lets you sell cash secured options AND you're comfortable with using options at all!-) -- you're unlikely to be assigned the stock at expiration (I feel secure that it *won't* be under 15 six months from now...!), but this means you'll make 10% of your capital commitment (more if you're comfortable using margin) in 6 months at minimal downside risk (your break-even point with a 1.5 premium would be 13.5 -- that would mean a decrease of over 13%, which seems very unlikely to me... though, remember, I'm NOT professionally qualified to give ANY advice in the financial field!!!-).

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