There are bargains to be found. AT&T stock is one of the two cheapest stocks in the S&P 500 communications services sector.
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The S&P 500 continues to trade at the very high end of its historical valuation range, even after a rocky November.
The index goes for about 21 times Wall Street analysts’ consensus estimates for 2022 per-share earnings, with sectors like technology and consumer discretionary going for well above that multiple. Other groups, like energy or financials, are available for much cheaper valuations.
But there are inexpensive stocks in all 11 S&P 500 sectors. Like a basketball player who is always open, there might be a good reason for many of those discounts. Just as opposing teams are sometimes better off concentrating their defense elsewhere on the court, some companies’ stocks can be cheap for a reason. Their growth may be scarce, or one-time factors could be distorting expected 2022 results.
Periodically surveying the market for the biggest valuation outliers can still be a good starting point for further analysis. Here are the three cheapest stocks in all 11 S&P 500 sectors:
S&P 500 Sectors’ Cheapest Stocks
| Company | Ticker | Price/2022E Earnings | Sector | Sector Average |
|---|---|---|---|---|
| AT&T | T | 7.3 | Communication Services | 20.8 |
| Discovery | DISCA | 7.7 | Communication Services | 20.8 |
| Lumen Technologies | LUMN | 7.8 | Communication Services | 20.8 |
| PulteGroup | PHM | 6.1 | Consumer Discretionary | 33.4 |
| D.R. Horton | DHI | 7.6 | Consumer Discretionary | 33.4 |
| Lennar | LEN | 7.9 | Consumer Discretionary | 33.4 |
| Altria Group | MO | 9.3 | Consumer Staples | 20.5 |
| Walgreens Boots Alliance | WBA | 9.9 | Consumer Staples | 20.5 |
| Molson Coors Beverage | TAP | 11.1 | Consumer Staples | 20.5 |
| APA | APA | 5.2 | Energy | 11.3 |
| Coterra Energy | CTRA | 5.7 | Energy | 11.3 |
| Diamondback Energy | FANG | 6.6 | Energy | 11.3 |
| Lincoln National | LNC | 6.1 | Financials | 14.6 |
| Invesco | IVZ | 7.6 | Financials | 14.6 |
| Capital One Financial | COF | 7.8 | Financials | 14.6 |
| Viatris | VTRS | 3.5 | Health Care | 16.9 |
| Organon | OGN | 5.0 | Health Care | 16.9 |
| Bristol-Myers Squibb | BMY | 7.3 | Health Care | 16.9 |
| Alaska Air Group | ALK | 11.3 | Industrials | 20.6 |
| Delta Air Lines | DAL | 11.6 | Industrials | 20.6 |
| Cummins | CMI | 12.2 | Industrials | 20.6 |
| Mosaic | MOS | 5.3 | Materials | 16.6 |
| LyondellBasell Industries | LYB | 5.9 | Materials | 16.6 |
| CF Industries Holdings | CF | 6.4 | Materials | 16.6 |
| CBRE Group | CBRE | 13.1* | Real Estate | 22.9* |
| Vornado Realty Trust | VNO | 13.2* | Real Estate | 22.9* |
| Simon Property Group | SPG | 13.4* | Real Estate | 22.9* |
| Western Digital | WDC | 6.8 | Technology | 28.0 |
| Hewlett Packard Enterprise | HPE | 7.7 | Technology | 28.0 |
| Western Union | WU | 7.9 | Technology | 28.0 |
| NRG Energy | NRG | 10.2 | Utilities | 19.9 |
| Edison International | EIX | 14.3 | Utilities | 19.9 |
| Sempra Energy | SRE | 14.9 | Utilities | 19.9 |
*P/2022E FFO
Source: Bloomberg, FactSet
The S&P 500 consumer discretionary sector is the priciest group in the index, going for more than 33 times expected 2022 earnings. The presence of high-multiple stocks Tesla (ticker: TSLA) and Amazon.com (AMZN) is responsible for a good chunk of that. Those two make up a combined 40% of the sector’s market cap, and go for 121 times and 68 times 2022 forecast earnings, respectively.
On the other end of the valuation spectrum in the sector are three U.S. homebuilding stocks: PulteGroup (PHM), D.R. Horton (DHI), and Lennar (LEN). Those trade for less than 8 times 2022 expected earnings.
The U.S. housing market has been enjoying a pandemic boom: Prices are at or near record highs in many regions, the supply of homes for sale is tight, and homebuilders’ profits are booming. Investors, however, don’t seem to expect that to last forever.
PulteGroup, D.R. Horton, and Lennar’s cheap valuations demonstrate what tends to happen to stocks of companies with cyclical end markets: 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.
A recent Barron’s cover story made the case for why the current housing boom could have legs, including the millennial generation aging into their home-buying years and a shortage of houses built since the financial crisis over a decade ago. Home builders’ cheap valuations make for an interesting entry point.
Technology stocks as a group are at 28 times next year’s estimated profits, while the sector’s cheapest stock— Western Digital (WDC)—goes for just 6.8 times. Cyclicality is behind that discount once again.
Western Digital operates in the highly cyclical memory chip market—periods of intense demand and high sales tend to be followed by slumps of oversupply and weaker pricing. A pandemic-era work-from-home boost to demand for computers, smartphones, and cloud infrastructure has kept inventories low and pricing high for Western Digital’s products. Investors know that won’t always be the case.
In the S&P 500’s cheapest sector, energy, APA (APA), Coterra Energy (CTRA), and Diamondback Energy (FANG) are the three cheapest stocks. The group as a whole goes for just over 11 times next year’s forecasted earnings, and its three cheapest members—all U.S. shale oil or gas producers—trade for between 5 and 7 times. Investors are clearly worried about the future of fossil fuels as the world moves toward renewable energy, and won’t pay up for oil and gas stocks.
Other particularly cheap S&P 500 stocks can be found in the healthcare sector. 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 summer—trade for the lowest valuations in the entire index. Spinoffs in general haven’t done well lately, and the brand-new stocks with generic-sounding names are likely under the radar for investors that don’t focus on healthcare specifically. Barron’s is more bullish on Organon than Viatris.
The two cheapest stocks in the S&P 500 communications services sector are also in the midst of major M&A: AT&T (T) and Discovery (DISCA). Both trade for close to 7.5 next year’s expected earnings, versus their sector’s average of 20.8 times. AT&T will spin off its WarnerMedia subsidiary around the middle of next year and merge it with Discovery, returning the storied American company to its telecom roots. Both companies will have much to prove, and many investors may be waiting until the transactions close next year to pick their pure-play bet: streaming entertainment via Discovery, or wired and wireless telecommunications services via AT&T.
Write to Nicholas Jasinski at [email protected]
