The S&P 500 index achieved a new record intraday high above the 1,880 level after a strong open yesterday. But that does not mean investors need to pay excessive valuations to put money to work in the current environment. On the contrary, companies such as Apple (NASDAQ:AAPL), Coca-Cola (NYSE:KO), and Gap (NYSE:GPS) offer strong fundamentals and attractive valuations for bargain hunters.
A deliciously cheap Apple
Apple is losing market share to lower-cost smartphones and tablets operating with Android as the mobile computing revolution expands to emerging markets, where the company's products are too expensive for many consumers and the carrier subsidy model is not as widespread as in the U.S.
However, the company is still the undisputed leader when it comes to the high end of the pricing spectrum, and this means rock-solid profitability and massive cash flow for investors. Apple has an operating margin in the neighborhood of 30% of sales, something most competitors in the industry can only envy, and the company produced an operating cash flow of more than $28.6 billion during the quarter ended in December.
Wall Street analysts are concerned about the company´s ability to innovate without Steve Jobs, but CEO Tim Cook has repeatedly promised Apple will roll out new product categories in 2014. This means we could be in a make or break year for Apple, as new product launches might provide improved visibility about the company´s innovative drive and growth potential.
The good news for investors is that Apple is not priced for much growth: the company trades at a P/E ratio of only 13 times earnings over the last year versus an average P/E ratio in the area of 18 for the companies that make the S&P 500 index.
If Apple can accelerate innovation and growth, the company offers substantial upside potential from current levels.
Always Coca-Cola´s dividends
Coca-Cola is facing slowing growth lately. Consumers in developed countries seem to prefer healthier alternatives to traditional sodas because of growing concerns over obesity and related health considerations. In emerging markets, where both sodas and drinks with lower calories offer considerable room for growth, currency fluctuations have been a drag on sales for Coca-Cola in recent quarters.
On the other hand, the company's leadership in the global soft drinks industry is unquestioned. Brand recognition is a huge strategic asset: Coca-Cola owns 17 brands making over $1 billion in global annual revenue, in addition to 20 other growing brands generating between $0.5 billion and $1 billion in sales.
This includes not only traditional sodas, but also categories such as waters, juice and juice drinks, sports drinks, and tea, all of which are positioned for growth among health-conscious consumers.
Whether consumers around the planet decide to go for typical sodas or drinks with better nutritional qualities, Coca-Cola has the brand power, geographical reach, and financial resources to adapt and thrive in a dynamic industry landscape.
Coca-Cola has raised its dividend for 52 uninterrupted years through all kinds of consumer environments and economic scenarios, so the company has proven its fundamental strength over time. The current dividend yield of 3.1% looks like a convenient entry point for such a sound dividend powerhouse.
The Gap is in the bargain bin
Fashion is usually considered a volatile and fickle business, especially when it comes to companies focused on young consumers. But Gap stands away from the competition due to its big presence in affordable basic fashion apparel targeting a wide and diverse clientele, which provides stability to the company´s performance over time.
Through its brands The Gap, Banana Republic, Old Navy, Athleta, Piperlime, and Intermix, the company owns or franchises 3,549 stores in 48 countries. This level of diversification across different brands and geographical markets allows Gap to pursue multiple growth venues at the same time, while reducing risks for investors.
Management seems quite confident about the company´s future, judging by recent dividend announcements. Gap in February raised its dividend by 10% to $0.22 per share, which puts the payout yield at nearly 2.2%.
The company is also cheaply valued in terms of earnings, with a P/E ratio of 15 times earnings over the last year and a forward P/E ratio of only 12 times earnings forecasts for 2015.
A harsh winter and an aggressive competitive environment have hurt companies in the sector lately, but Gap has what it takes to successfully weather the storm and continue generating reliable results over years to come.
The market may be near historical highs, but that doesn´t mean all stocks are necessarily overvalued. Investors hunting for solid companies trading at convenient valuations can find interesting candidates in names such as Apple, Coca-Cola, and Gap. People call it the stock market, but it's actually a market of stocks, offering many different alternatives with their own individual characteristics.