The Shiller Price-to-Earnings (P/E) Ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE), is commonly used to assess the valuation of the S&P 500. Popularized by Nobel Laureate Robert Shiller, the metric takes the current price of the S&P 500 and divides it by the average inflation-adjusted earnings of the last 10 years. It's viewed as a rather reliable indicator of whether or not U.S. equities are on sale or expensive.
So, um, bad news for bargain investors: the Shiller P/E Ratio of the S&P 500 currently sits at 31.3 -- a value that's only been higher during the run-up to the popping of the dot-com bubble at the turn of the century. But that doesn't mean value stocks are dead.
In fact, pulp-and-paper giant WestRock (WRK -12.67%) and newly profitable pharma company Vanda Pharmaceuticals (VNDA -0.13%) are looking pretty attractive right now. Here's why they're two of the top stocks you can buy on sale today.
Anything but a paper tiger
Decades ago, some analysts thought the emergence of the personal computer signaled the beginning of the end for America's paper industry. It turned out to be a huge shot in the arm -- and the same counterintuitive relationship exists today. Despite an increasingly digital world economy, the rise of e-commerce and the global middle class have acted as an historic boon for the pulp-and-paper industry, especially sales of cardboard.
WestRock reported that North American box shipments jumped 3.1% year over year in its fiscal Q1 2019 (the period ending Dec. 31, 2018), which outpaced domestic economic growth during the period. Toss in contributions from the all-important $4.9 billion acquisition of KapStone and the business achieved a 13.5% year-over-year growth clip. Not bad for the boring world of cardboard.
That success should continue thanks to a concerted effort to get customers hooked on paper packaging. WestRock said that more than 130 customers bought at least $1 million from each of its two operating segments, representing $6 billion in annual sales. The business has over 15,000 customers, which gives it confidence it can turn on the charm and preach about the sustainability benefits of renewable, paper-based packaging to pounce on a significant organic growth opportunity.
That makes the company's current valuation all the more enticing to investors. WestRock trades at just nine times future earnings, 85% of book value (meaning shares need to rise over 17% to be valued in line with shareholders' equity), and a PEG ratio of 0.64 -- all below the industry average and more attractive than larger peer International Paper. What's more, investors will be rewarded for their patience, thanks to the stock's 4.7% dividend yield. This is quietly one of the top bargain stocks on the market today.
In the dog house for animal-study requirement
In February 2019, Vanda Pharmaceuticals announced it was pushing back against the U.S. Food and Drug Administration's (FDA) partial clinical hold on an important clinical asset by... suing the regulator. Things definitely escalated quickly.
The drug candidate tradipitant is being developed to treat gastroparesis and could represent the first new drug approved for the disease since 1979. It could generate up to $900 million in annual revenue if approved. But it cannot be tested in humans for longer than three months until Vanda Pharmaceuticals provides additional safety data from animal studies lasting at least nine months.
Management says the spat with the FDA won't affect development timelines, but the situation has cast a cloud of uncertainty over the timing of the start of a pivotal phase 3 study. Shares have slipped 33% since the start of the year.
While learning that the FDA has placed a partial clinical hold on a promising drug candidate isn't ideal, the strange thing about the entire fiasco is that Vanda Pharmaceuticals is actually a profitable and growing pharma. The business grew revenue 17% year over year in 2018. It delivered operating income of $21.7 million last year, compared to an operating loss of $16.9 million in 2017. It started 2019 with $257 million in cash, cash equivalents, and marketable securities.
Put another way, the company's fate isn't exactly tied to a potential nine-month delay in the development arc of tradipitant. But Wall Street's knee-jerk reaction has created a great opportunity for long-term investors. Shares of Vanda Pharmaceuticals trade at just 19 times future earnings, less than five times sales, and at a PEG ratio of 0.88 -- all very attractive relative to commercial-stage peers.
Investors capable of putting emotions aside and taking a neutral view of recent events will likely realize the stock is significantly undervalued right now.