A medical staff member preparing a shot of the Moderna Covid vaccine in England. Moderna is one of the cheapest stocks in the S&P 500, based on price-to-earnings ratios.
Leon Neal/Pool/AFP/Getty Images
Value investing is making a comeback and could continue to best growth strategies if markets remain rocky. That’s because low valuations can offer investors a margin of safety.
There is no simpler way to search for bargains than using price-to-earnings ratios.
Barron’s screened the S&P 500 index using FactSet for the 10 cheapest stocks based on 2022 P/E ratios and turned up a varied list that includes Covid vaccine provider Moderna (MRNA), home builders Lennar (LEN) and PulteGroup (PHM), steel industry leader Nucor (NUE), fertilizer producer Mosaic (MOS), and energy companies APA (APA), formerly Apache, and Coterra Energy (CTRA).
Rounding out the list are drugmakers Viatris (VTRS) and Organon (OGN) and life insurer Lincoln National (LNC).
All 10 trade for six times earnings or less and most have above-market dividends, with Organan and Viatris yielding over 3%.
Several of the listed companies are in economically sensitive businesses, but some hit to earnings is already factored into their stocks given their depressed P/E ratios.
Bargain Assortment
Here are the 10 cheapest stocks in the S&P 500 based on price-to-earnings ratios.
| Company / Ticker | Recent Price | 2022E P/E | Dividend Yield |
|---|---|---|---|
| Viatris / VTRS | $14.07 | 3.8 | 3.3% |
| Nucor / NUE | 90.74 | 4.8 | 2.2 |
| Organon / OGN | 29.88 | 4.9 | 3.6 |
| Mosaic / MOS | 38.32 | 5.0 | 1.1 |
| APA / APA | 29.02 | 5.1 | 1.7 |
| Moderna / MRNA | 148.55 | 5.2 | None |
| Coterra Energy / CTRA | 19.28 | 5.2 | 2.6% |
| PulteGroup / PHM | 53.05 | 5.6 | 1.2 |
| Lincoln National / LNC | 64.42 | 5.9 | 2.7 |
| Lennar / LEN | 94.79 | 5.9 | 1.6 |
E = estimate
Source: FactSet
Nucor, whose shares have come down to around $90 from a recent $120 along with other steel stocks, now trades for about five times projected 2022 earnings and yields over 2%. Benchmark hot-rolled steel prices are down from a 2021 high of $1,900 a short ton to about $1,400 and futures market anticipate prices around $900 a ton by mid- year.
That could dampen Nucor’s earnings, but the company should remain highly profitable. Management thinks the stock is cheap as the company bought back stock equivalent to more than 10% of its current market value in 2021. The shares yield over 2%.
Moderna, whose shares trade around $148, is down about 70% from its summer 2021 peak of almost $500 and trades for just five times projected 2022 earnings.
Investors are worried about its earnings outlook after Covid vaccine sales peak and about the strength of Moderna’s drug pipeline. But Covid revenues could be durable and run at elevated levels into 2023 and 2024.
The company, with a current market value of $60 billion, could have more than $20 billion of net cash and investments on its balance sheet at the end of 2022, meaning investors are paying little for its powerful messenger RNA franchise. Moderna could become a takeover candidate if the stock continues to languish.
Home-building stocks have been hit lately as investors worry that the recent rise in 30-year mortgage rates to about 3.5% from 3% will hurt sales. There might be some impact from higher rates but the industry is benefiting from favorable demographics and affordability which could mean years of robust sales.
Lennar , at $95, trades for about six times projected earnings of $16 a share in its fiscal year ending in November.
The company has ramped up its stock buybacks lately, highlighting the industry’s financial strength. Investors can buy the company’s supervoting class B stock at around $80, a 15% discount to the more liquid A shares. Barron’s has written that the B shares are the best way to play Lennar.
Home-building bull Stephen Kim, an analyst at Evercore ISI, sees the stock benefiting from a planned 2022 spinoff of non-core multifamily and single-family rental businesses. He has a price target of $179.
Pulte, whose shares trade around $53, also is cheap, trading for under six times projected 2022 earnings. The company has used its ample free cash flow to repurchase 5% of its stock in the first nine months of 2021. Kim sees higher margins and sales in 2022 and has a target of $86 on the stock.
APA, an exploration and production company, has joined others in the industry in committing to return ample cash to shareholders. APA, whose shares trade around $28, plans to give out 60% of its 2022 free cash flow to holders in buybacks and dividends.
J.P. Morgan analyst Arun Jayaram sees APA generating over $2 billion of free cash flow in 2022, for a roughly 20% free cash flow yield.
Viatris and Organon are both spinoffs: Viatris was hived off by Pfizer , while Organon was jettisoned by Merck.
Both have languished since they became independent and trade cheaply. Viatris, at around 14, is valued at less than four times projected 2022 earnings, the lowest P/E in the S&P 500. Organon fetches around five times estimated 2022 earnings. Both have ample debt, which holds down their valuations.
Coterra was formed from the 2021 merger of Cabot Oil & Gas and Cimarex Energy. Its shares at around $19, trade for less than six times estimated 2022 earnings. It plans to return half its free cash flow in dividends and buybacks this year.
Lincoln National , a provider of annuities, life insurance, and other financial products, trades around $64 and yields 2.7%. Mosaic, a producer of phosphate and potash fertilizers, fetches about $38 and trades for five times estimated 2022 earnings.
Write to Andrew Bary at [email protected]
