Here Are the Cheapest Stocks in Each Sector. Some Deserve the Discount, Others Look Like Bargains.
AT&T is among the cheapest stocks in the S&P 500 communications sector.
David Paul Morris/Bloomberg
Stocks with high valuations aren’t hard to find today, after a massive rally to record highs for major indexes. But there are still pockets of the market that look like bargains. It’s up to investors to decide whether that discount is deserved—or an opportunity for future gains.
Even in some of the market’s priciest sectors—such as technology or consumer discretionary—there are companies that trade for large discounts to the S&P 500’s 20.6 times Wall Street analysts’ consensus estimates for 2022 per-share earnings.
Here are the three cheapest stocks in all 11 S&P 500 sectors:
Each S&P 500 Sector’s Cheapest Stocks
*P/2022E FFO
Source: Bloomberg
(If you cannot view the table above, please click here.)
Hewlett Packard Enterprise (ticker: HPE), Micron Technology (MU), and Western Digital (WDC) all go for less than 8 times next year’s estimated earnings—compared with a 29 times 2022 price-to-earnings for the tech sector on average. That’s a big gap, but it isn’t unreasonable.
Computing infrastructure-focused Hewlett Packard Enterprise lacks the rapid sales growth and wide profit margins that many of the tech sector’s software-as-a-service leaders boast. The company, which split off from the PC and printer-focused HP Inc. (HPQ) in 2015, has managed to show top-line growth in only one quarter since 2018, its latest. Investors will want to see that become a trend before giving the stock credit in the form of a richer valuation multiple.
Micron and Western Digital both sell into the highly cyclical memory chip market, with periods of intense demand and high sales tending to be followed by slumps of oversupply and weaker pricing. Right now, the industry is in boom times. After a year of working from home boosted demand for PCs, smartphones, and cloud infrastructure, memory inventories are low and customers are paying up. Analysts expect near-record earnings per share for Micron in its fiscal 2022, which ends in August, but the stock price hasn’t kept pace.
That’s what tends to happen to cyclical stocks: Multiples contract toward the top of the cycle, because investors worry that things are as good as they’re going to get and the current level of earnings won’t be sustainable. That makes Micron and Western Digital stocks look cheaper than they really are.
In the even pricier consumer discretionary sector—home to Amazon.com (AMZN) and Tesla (TSLA)—the cheapest stocks are all home builders: PulteGroup (PHM), Lennar (LEN), and D.R. Horton (DHI). Cyclicality is to blame once again. The housing market is setting records and multiyear highs left and right, and it’s unlikely to keep up that torrid pace over the medium to long term. So investors are valuing those three home builder stocks at peak-cycle multiples, all under eight times next year’s estimated earnings.
The cheapest stocks in the S&P 500—across sectors—are a pair of recent pharma-company spinoffs: Viatris (VTRS), jettisoned from Pfizer (PFE) last year and merged with Mylan, and Organon (OGN), excised from Merck (MRK) last month. They’re both brand-new stocks with generic-sounding names that have likely kept them relatively under the radar among non-healthcare focused investors. But while analysts have been skeptical about Viatris’ long-term growth prospects, there is more to like about Organon—a recent Barron’s stock pick. The two trade for just 3.9 times and 5.3 times next year’s earnings, respectively, versus the healthcare sector’s 26.3 times.
The S&P 500 communications services sector is dominated by companies including Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX)—all relatively pricey stocks with fast and sustainable growth rates. At the bottom of the sector by valuation, meanwhile, are a pair of companies in the midst of transitions in their businesses: AT&T (T) and Discovery (DISCA). Both trade at around 9.5 next year’s earnings versus the sector’s 23.5 times average. Earlier this year, the former agreed to spin off its WarnerMedia subsidiary and merge it with the latter, leaving AT&T to focus on its wireless and wired telecom businesses while the combined Discovery/WarnerMedia pursues the global streaming entertainment opportunity.
That announcement was met with skepticism from the market, and a planned dividend cut from AT&T led to anger from the stock’s shareholder base, which is heavy with income investors. There is a lot that both companies will need to prove to investors, and each has deep-pocketed competitors and other challenges. But undemanding valuations make their stocks less of a lift for investors willing to be contrarian.
The most expensive of the S&P 500’s 11 sectors is real estate, at nearly 69 times 2022 estimated earnings. But that is misleading, with real estate investment trusts tending to be valued based on their funds from operations, or FFO. That adjusts for depreciation and sales of property, homing in on the cash that a REIT’s properties generate. S&P 500 real estate stocks trade for about 22 times next year’s P/FFO on average.
By that metric, the cheapest stocks in the sector are Simon Property Group (SPG), Weyerhauser (WY), and CBRE Group (CBRE)—all going for 13 or less times their estimated 2022 FFO.
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