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Many investors are uneasy about the U.S. stock market’s valuation nowadays. In a way, this doesn’t make sense. The S&P 500’s
SPX
p/e of 20 falls to 15 if you back out the 50 largest stocks such as NVDIA
NVDA,
), Meta Platforms
META,
) and Tesla
TSLA,
).
This adjusted valuation is one reason I think it makes sense to buy stocks on weakness. But if you are still worried about richly priced stocks, consider that four individual market sectors offer attractive values, according to Bill Nygren, the veteran manager of the outperforming Oakmark Fund OAKMX.
“For an investor who wants to focus on value, there’s an opportunity to put together a reasonably well-diversified portfolio at under 10 times earnings,” Nygren says. He suggests looking in these single-digit p/e sectors: Financials; legacy media; insurance and autos. Many of the cheap stocks in these groups pay solid dividends and are doing large share repurchases because they see value in their stocks, too.
With that in mind, I recently checked in with several value managers at T. Rowe Price, Gabelli Funds and elsewhere for a short list of names in these groups.
Financials
To find attractive names in this space, Ian Lapey at Gabelli Global Financial Services Fund GGFSX prefers well-capitalized banks with strong management. His fund has beaten its Morningstar benchmark and competing funds by about eight percentage points annualized over the past three years, according to Morningstar Direct.
Lapey’s biggest fund position, First Citizens BancShares
FCNCA,
trades at around nine times earnings and 1.2 times tangible book value. So, it is still attractive, especially considering the assets it gained when it picked up what remained of SVB Financial Group
SIVBQ,
on the cheap after the California bank failed last March.
Lapey also singles out other fund holdings: Capital One Financial
COF,
which trades at 9.7 times earnings and 1.3 times tangible book value; Citigroup
C,
which goes for about 9 times earnings and 56% of tangible book value, and Germany’s Commerzbank
CRZBY,
at six times earnings and a 50% discount to book.
Capital One Financial has never lost money during recessions and has been growing tangible book value by 14% a year since 1994, so it should hold up in any downturn and beyond. Citigroup is a restructuring turnaround under CEO Jane Fraser. Its earnings could improve as expenses linked to investments in improving risk management roll off, and the bank exits non-core markets in Taiwan, Indonesia and Mexico. Meanwhile, Commerzbank has cut its branch network in half and now benefits from much more efficient operations.
Nygren holds Wells Fargo
WFC,
as a top position in the Oakmark Fund. Earnings should improve as expenses associated with the bank’s regulatory issues roll back. The bank has one of the biggest branch networks and deposit bases in the country.
Legacy media
Legacy media companies Comcast
CMCSA,
and Charter Communications
CHTR,
aren’t strictly speaking single-digit p/e companies. But with a p/e in low double-digits they are close. And they look cheap by other measures such as enterprise value to cash flow.
Their shares are discounted because of challenges including consumers cutting cable services, the cost of rolling out streaming services and advertising weakness. The stock discounts may be too extreme. One reason is that these two companies are fighting back by offering wireless connectivity which is a higher margin business, notes Chris Marangi, a portfolio manager and media sector analyst at Gabelli. He also thinks streaming services will pay off and boost performance at some point, and that the ad market weakness won’t last.
Todd Lowenstein, chief equity strategist at HighMark Capital, singles out Walt Disney
DIS,
as an unloved and out-of-favor media company with high-quality entertainment assets. It’s also not a single digit p/e stock. But it is worth a mention because following a 55% decline in its stock from 2021 highs, Disney shares go for 18 times earnings, a significant discount to its five-year average of 29. Under former CEO Bob Chapek, Disney spent heavily to “chase growth at all costs,” says Lowenstein. But now that Bob Iger is back at the helm, Disney is focused on rolling back spending to improve profitability. “The stock is too cheap for its asset quality,” says Lowenstein. “Their content is second to none.”
Nygren owns Warner Bros Discovery
WBD,
in the Oakmark Fund. Earnings are currently held back by the high cost of its foray into streaming. If that works out, the stock will do well. If not, the company can fall back on its rich media library and turn profitable by licensing content to other streaming companies. It’s also a potential buyout target, for the content.
Insurance
Insurance companies generally trade for around five to 10 times earnings, which makes them historically cheap. This is surprising given that the industry is in its sixth year of a pricing supercycle, and rising interest rates make insurance company bond portfolios more profitable as they turn over, says Greg Locraft, the U.S. insurance portfolio manager and equity analyst at T. Rowe Price. Insurance companies park most of their float in bonds.
So why the discount? One reason is that investors think earnings growth now may be as good as it gets, Locraft says. Investors also worry about insurance company exposure to commercial real estate, and credit issues in general, via their bond portfolios.
But Locraft believes earnings strength will last longer than the skeptics think. He cites persistent pricing power and rising returns on bond portfolios. “The evidence is overwhelming that we are not at a peak for earnings. I see years of growth ahead for the sector,” says Locraft, whose favored insurance stocks are held in the T. Rowe Price Financial Services Fund PRISX and the T. Rowe Price U.S. Equity Research ETF
TSPA.
Locraft adds that insurance companies for the most part have strong enough balance sheets to absorb any commercial real estate-related losses.
He singles out Chubb
CB,
as one favorite. The company recently posted record profits on strong revenue growth, yet its shares trade near an all-time low based on forward p/e, which stands at 11.3. Nygren’s fund has a meaningful position in American International Group
AIG,
which trades at a forward p/e of 9.6.
Autos
In this sector, Nygren singles out shares of General Motors
GM,
which trade at a forward p/e of 5.4. This low p/e seems excessive, given that the company beat estimates and raised guidance for the second quarter, and posted adjusted automotive free cash flow that nearly quadrupled year-over-year to $5.5 billion, says Morningstar analyst David Whiston.
Whiston thinks GM stock may be held back by fears of a possible strike this fall and frustration with the slow rollout of GM’s electric vehicles (EVs). But he believes GM EV sales will pick up as GMC Hummer production rises this year. GM also says it will continue producing the Bolt EV. “GM’s earnings potential is excellent,” Whiston says.
Michael Brush is a columnist for MarketWatch. At the time of publication, he held NVDA, META and TSLA. Brush has suggested NVDA, META, TSLA, WFC and AIG in his stock newsletter, Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks
