15 cheap stocks for an expensive market

Analysts at Goldman Sachs say the current environment may favor a shift into cyclicals, and offer some possibilities.

By MSN Money Partner Jun 24, 2014 4:05PM
Credit: © David Duprey/AP
Caption: The Corning Inc. headquarters is shown in Corning, N.Y.By Barbara Kollmeyer, MarketWatch

Even if the week didn't start with the bang it ended with last week, the "this-market-is-looking-expensive" chatter will not be put down against the backdrop of a dovish Fed and an Standard & Poor's 500 Index ($INX) that has 22 record closes under its belt for the year so far.

Goldman Sachs (GS), for one, doesn't see much standing in the way of more stock-market gains.

In a note to clients on Friday, chief U.S. equity strategist David Kostin and his team said they expect the S&P 500 to grind up over the next two-plus years as earnings growth continues, and rolling forward their 12-month price target to 2,000 -- 2,100 in 2015 and 2,200 in 2016 are further-out targets. (Note that one of the most bearish Wall Street analysts, Deutsche Bank's David Bianco, also thinks stocks are looking pricey, but doesn't see the S&P 500 reaching 2000 until end 2015.)

From Goldman comes the question and answer of how to find a happy meeting place at the intersection of value and growth.

"Improving growth and low bond yields are positive for continued strong equity performance while elevated valuation gives us some pause," said Kostin. "Higher growth and low yields favor a shift into pro-cyclical equities but sticker shock following a prolonged rally makes the decision less clear."

The forward price-to-earnings ratio for the S&P 500 is at 16.5, an 18 percent premium to the average seen during similar real interest-rate environments of 1 percent to 2 percent, notes Kostin. The average seen since 1976 is 13.5 times along with real interest rates of between 1 percent and 2 percent. And margins have also stagnated at a record high level since 2011.

"Paying a near-peak p/e multiple on peak margins does not offer portfolio managers much downside cushion. Simply put, high starting valuation often leads to mediocre forward returns," says Kostin.

Goldman's solution? Cyclicals versus defensives. Kostin and his crew lay out 15 stocks that offer a 25 percent forward p/e discount versus the S&P 500 median stock, 60 percent faster 2015 EPS growth and a higher dividend yield of 90 basis points.  Ten of those 15 have also lagged the S&P 500 in 2014.

Five are consumer discretionary:

  1. Ford (F
  2. General Motors (GM)
  3. Lowe's (LOW)
  4. Whirlpool (WHR
  5. GameStop (GME

Five are materials companies:

  1. Dow Chemical (DOW
  2. Freeport-McMoRan Copper & Gold (FCX)  
  3. International Paper (IP)
  4. Nucor (NUE)
  5. Avery Dennison (AVY

And rounding up the rest:

  1. Principal Financial (PFG)
  2. Aetna (AET)
  3. Eaton (ETN)
  4. Stanley Black & Decker (SWK
  5. Corning (GLW)

More from MarketWatch
Jun 24, 2014 7:12PM


Hillary voted for the Iraq war.

The senate vote was 98 for 2 against

Bill Clinton, during his term REPEATEDLY BOMBED Iraq.  Why?  Suspectyed WMD sites.

Hillary said "she did her own do diligence". With her vast experience in the WH "I know Saddam will never give up HIS WMD"  (google the speech yourself)

I could go on, but if you are a leftist you are never interested in the truth or reality.

Jun 25, 2014 7:56AM

Biden and his bunch would throw their mother under the bus for a vote.  They haven't a clue and don't care about what our country needs.  The answer is, "Them Gone"!

Jun 24, 2014 8:26PM
Check the "black book".  Foster and on. 
Jun 25, 2014 5:16AM
Get ready people...Get ready for the new American Revolution! We will be fighting here on our own turf soon. We will be fighting all of these illegal's that are flooding into this country by the tens of thousands. Don't you think that for just one second that this is getting under control...As the Carpenters sang it so well......we've only just begun. "It's Our Turn America"
Jun 25, 2014 8:47AM
I like the banks , because rising interest rates will improve bank profits. Wells Fargo , JP Morgan Chase , Bank of America and Citi, in that order. I tell my friends who want to buy a CD at .75% interest to buy stock in Wells Fargo instead , which pays a 2.76% dividend.  
Jun 25, 2014 12:25AM
Now that the "Brain Trusts" of Washington DC have lost the Iraq War; They can now attack Labrador. We can almost see it from the top of the mountain. They may be able to take it and they can look for oil and spend lots of money.
Jun 25, 2014 4:31PM
"The forward price-to-earnings ratio for the S&P 500 is at 16.5, an 18 percent premium to the average seen during similar real interest-rate environments of 1 percent to 2 percent..."

The forward P/E is a deceitful mirage.  Note that to get from the current trailing-earnings P/E of 19.6 companies' earnings would have to increase an avg. 18.8% - minus a percent or so due to stock buybacks - assuming the P/E remains at a relatively high 19.6 for trailing earnings.

NO ONE in their right mind thinks that will come close to happening.

That's why those of us who do value studies of stocks do not rely on forward projections except where a competitive advantage may become more important in the future than the past.  For example, if new competitors need to may much more now than the company did for real estate, equipment, etc.
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