It wasn’t a great year to be invested in the stock market. And, to make matters worse, stocks still look expensive. The average stock in the S&P 500 has a price-to-earnings ratio of 16, based on next year’s profits. That’s one of the highest levels of the past decade.
But the downdraft in the market has likely created some opportunity. We looked at what stocks might be the best bargains in the Fortune 500. But how do you define a bargain in the stock market?
Third quarter GDP was just revised down to 2%, from 2.1%. So companies that are growing faster than that rate should get a premium from investors. Many aren’t.
One of the classic ways value investors gauge whether a stock is a buy is to compare its price-to-earnings ratio to its growth rate. (The p/e ratios and growth rates below are based on what analysts project the companies will earn in 2016.) If the p/e is lower than a company’s projected growth rate, then its shares might be a good buy right now. Of course, it also means that investors are skeptical that earnings will grow as fast as some expect, but that’s the risk you take when you rummage through the bargain bin.
JetBlue
Price/Earnings Ratio: 10.2
Expected Earnings Growth: 19%
JetBlue's shares were up for most of 2015, peaking in mid-September. But they hit a patch of turbulence recently. Earlier this year, JetBlue (JBLU) started charging fees for all checked bags. That was meant to boost profits, but some Wall Street analysts thought it would hurt JetBlue's relationship with customers. Indeed, its closely watched passenger utilization rate slipped in the third quarter. Still sales and profits were up just over 10%. Next year, JetBlue's new fees are supposed to fully kick in, boosting profits by nearly 20%. The company says it has let its oil hedge lapse for 2016. Lower hedging costs could be another boost to profits, but it also raises the risks if oil prices reverse, which could be one reason why JetBlue's stock is cheap.
Office Depot
Price/Earnings Ratio: 9.6
Expected Earnings Growth: 21%
The proposed acquisition of Office Depot (ODP) by Staples (SPLS) is on the rocks. The Federal Trade Commission is suing to block the deal. That's the big reason Office Depot's stock is down. Some are worried that the company will not be able to survive unless it combines with its larger rival. But the economy is improving and Office Depot returned to profitability in 2015. Even without a deal, analysts expect the company's profit to grow by just over 21% next year. But it will take considerable cost cutting. Bargain investors might be willing to take the risk. Staples' offer valued Office Depot at $11 a share. The company's stock is now trading for less than half of that. And many think if the Staples deal doesn't go through, Office Depot, pushed by activist investors, will likely find another partner, like FedEx or UPS.
Ford and General Motors
Price/Earnings Ratio: 7.3, 6.3
Expected Earnings Growth: 18%, 12%
Domestic car sales are expected to have their best year on record in 2015. Yet the shares of Ford (F) and General Motors (GM) have been lackluster this year. That's in part because both are in the process of renegotiating their contracts with United Auto Workers, which is likely to bring higher costs. What's more, while domestic auto sales have been good, sales overseas have lagged. And the recalls have continued. But analysts think earnings can continue to increase next year. And GM has a backer in one of the most famous value investors, Warren Buffett. Buffett's Berkshire Hathaway (BRK-A) upped its stake in GM to 50 million shares in the third quarter, which was worth $1.7 billion.
Morgan Stanley
Price/Earnings Ratio: 10.3
Expected Earnings Growth: 29%
Morgan Stanley had a rocky 2015. It started the year strong, but then the bank missed its third quarter earnings projections by roughly 30%. Bond trading was a continued problem, and in November Morgan Stanley (MS) announced it was laying off 25% of its debt division team. Shares are down 16% for the year, which could represent a bargain. Analysts predict that the company's earnings will rise 29% next year. The layoffs should help. Also Morgan Stanley will have to prove that it is equipped to weather the ups and downs of the market.
