The stock market has marched almost unceasingly higher since bottoming out in 2009, driving the S&P 500's price-to-earnings ratio well above its long-term average. Finding truly cheap stocks has become more difficult, but that doesn't mean there aren't good values waiting for investors willing to bet against the consensus.
We asked three of our Foolish investors to each suggest a stock that, for one reason or another, looks absurdly cheap in this expensive market. They came up with Target (TGT 1.30%), AbbVie (ABBV 1.63%), and Chipotle Mexican Grill (CMG 0.64%). Here's what you need to know.
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A beaten-down retail stock
Tim Green (Target): Retailer Target surprised everyone when it bumped up its guidance for the second quarter on July 13, citing improved traffic and sales trends. The company now expects a modest increase in comparable sales, along with earnings above the high end of its previous guidance range. The stock rose on the news, but it remains down substantially over the past year.
Analysts expect Target to produce $4.37 in per-share adjusted earnings this year, putting the stock at about 12.4 times earnings. Given that Target is a brick-and-mortar retailer in a world where consumer dollars are shifting online, there's plenty of justification for pessimism despite the beaten-down valuation. But I wouldn't count Target out just yet.
Target's plan is to invest in exclusive brands, e-commerce, and smaller store formats. In May, the company launched Cloud Island, a line of baby products, and it plans to launch four new brands in the next few months and a total of 12 new brands by the end of 2018. Target isn't aiming to mimic Amazon, selling everything under the sun. Instead, the retailer will differentiate itself with exclusive products.
Target also pays a dividend, which currently yields around 4.5% thanks to the knocked-down stock price. Target has increased its dividend annually for 46 consecutive years, a record that should give investors some confidence that the company can maintain that dividend as it works through the current upheaval in the retail industry.
There are no guarantees that Target will successfully adapt to a changing retail landscape. But a cheap stock price combined with a decades-long record of dividend increases should put Target near the top of the list when it comes to retail stocks.
Biosimilar fears are overblown for this biotech
Keith Speights (AbbVie): AbbVie's revenue increased 10% year over year in the first quarter. Its earnings jumped 26%. The biotech has the top-selling drug in the world with Humira. It boasts one of the strongest pipelines in the entire biopharmaceutical industry. Its dividend yields 3.56%. So why is AbbVie trading at only 11 times expected earnings?
The primary reason is that many are worried about the potential impact of biosimilar competition for Humira. Amgen (AMGN 0.47%) won FDA approval last year for Amjevita, its biosimilar to Humira. Because Humira generates 63% of AbbVie's total revenue, investors are rightfully concerned about the threat.
However, AbbVie has a good strategy to deal with this challenge, in my view. The company has 61 patents for Humira still in effect -- and it's asserting rights to all of them. AbbVie and Amgen are waging their battle in the legal system. The trial has been set to begin in November 2019. Time does fly, but that's still quite a way off. AbbVie thinks it can win and hold rivals at bay until 2022.
The other part of AbbVie's strategy is to get more help from its other drugs and its pipeline. Imbruvica is on track to become the fourth best-selling cancer drug in the world by 2022. AbbVie's pipeline includes several other potential blockbusters, such as autoimmune-disease drug ABT-494, cancer drug Rova-T, and Elagolix, which targets treatment of endometriosis and uterine fibroids.
AbbVie seems to be in great shape to continue its winning ways for years to come. This stock is priced at a very attractive level considering its growth potential and strong dividend.
Chipotle's renewed troubles are an opportunity
Steve Symington (Chipotle Mexican Grill): Just when things had started to look up for Chipotle, with its turnaround taking hold, the stock took a dive last week, when the company temporarily closed a single location in Virginia after a norovirus outbreak spurred renewed food-safety fears. But wherever they happen, norovirus cases tend to be limited to a single location and don't necessarily indicate improper food-preparation conditions, according to food-poisoning experts speaking to Business Insider. So this should not be taken as indicative of a broader problem at Chipotle's 2,300-plus locations nationwide, especially considering the company has implemented industry-leading supply-chain and food-prep measures to ensure it's among the safest places to eat in the country.
Of course, we should hear more about the incident when Chipotle reports second-quarter results next week. And there's certainly a chance that it could crimp traffic in the near term. The stock trades at around $346 per share as of this writing. That's roughly 23 times Chipotle's peak earnings of $15 per share achieved in 2015, when it had around 400 fewer restaurants and a significantly higher share count than today thanks to repurchases in recent quarters. I'm convinced that over the long term, Chipotle's turnaround will continue to chug forward and the company will be able to eventually recapture those levels of profitability. If it can command a reasonable premium of around 30 to 35 times earnings when that happens -- which would still be well below its historical P/E in the 40 to 50 range prior to its recent troubles -- the stock could prove to be a mouthwatering bargain for investors who buy now.
