One painful mistake investors can make is to rely too much on stock screeners when looking for possible investments. For example, if they start their search by filtering out stocks with high earnings multiples, they may overlook promising businesses that have had an off year, but that are still relatively cheap.
Alibaba Group Holdings (BABA 2.33%) and CVS Health (CVS -0.17%) both fall into that category, and they may be great buys right now.
1. Alibaba Group Holdings
Trading at a whopping 150 times earnings, Alibaba is a stock that investors could easily overlook when using screeners. COVID lockdowns in China have been weighing on its operations, and in the quarter that ended Sept. 30, it reported a net loss of $2.9 billion, in part due to investment-related losses which sent the company's financials from bad to worse.
The Chinese-based e-commerce company, however, should have brighter days ahead now that China has relaxed its restrictive zero-COVID policies. The company's growth rate should improve although it may not get back to the levels of previous years.
BABA Revenue (Quarterly YoY Growth) data by YCharts.
According to a Reuters poll of economists, the Chinese economy is likely to grow at a rate of 4.9% in 2023, up from less than 3% last year. A stronger Chinese economy would be good news for Alibaba, and make it more likely that the business could get back to generating better growth numbers.
Alibaba stock could be a great way to invest in a Chinese economy that's opening back up. And with a forward price-to-earnings multiple of just 13 (the S&P 500 average is around 18), it's arguably a cheap buy. At these levels, it could look like a steal of a deal in a few years.
2. CVS Health
Healthcare giant CVS Health also looks expensively valued, trading at a price-to-earnings multiple of 37. That's extraordinarily high for a modestly growing business. By comparison, the average healthcare stock trades at just 22 times earnings.
The reason for that inflated multiple is that in the third quarter, CVS incurred an operating loss of $3.9 billion due to two big hits to its income statement: a $5.2 billion charge related to opioid litigation and another $2.5 billion loss on the sale of assets from its long-term-care business. As a result, the company's trailing profits over the past four quarters totaled just $3.2 billion -- less than half the more than $7 billion in profit that the company posted in both 2020 and 2021.
Based on analysts' forecasts, CVS is trading at less than 10 times its future earnings. The company has been expanding its business in recent years with further pushes into healthcare, including the launch of HealthHub locations at its stores. Last year, it also announced plans to acquire home health company Signify Health, and it's eyeing an expansion into primary care. Through all these initiatives, the business is in great shape to continue growing, making it a great option for long-term investors.
Plus, with a dividend that yields 2.8% at the current share price, investors can collect above-average payouts from the stock. (The S&P 500's average dividend yield is now just 1.7%.) CVS is also trading near its 52-week low, giving investors even more of an incentive to buy as this beaten-up stock has loads of potential to move higher.
