7 Top-Ranked Value Stocks To Buy Today

Michael Vodicka's picture

Friday, October 6, 2017 - 2:30pm

by Michael Vodicka

The S&P 500 is having a great year. The leading index is up 13% in the first three quarters of 2017. At this rate it's is on pace to finish with an 18% total return in 2017.
 
By almost every measure this is great news for investors. However, in one way it creates a dilemma. U.S. stocks looks expensive right now compared to historical averages and international counterparts.
 
The S&P 500’s P/E ratio of 25 is at the higher end of its long-term range. Take a look below.
 
 
This P/E ratio is also a sharp premium to its international counterparts. For example, the iShares MSCI Emerging Markets (NYSE: EEM), which broadly tracks emerging market equities, has a forward P/E ratio of 13. The Vanguard Total World Stock Index (NYSE: VT) has a forward P/E ratio of 17.5.
 
This relatively high valuation is making a lot of investors nervous. Not only can it be intimidating for investors to buy stocks trading at an all-time high, but an overbought market makes it difficult to find value stocks.
 
According to historical data, this has important implications for potential returns. A recent study by Bank of America Merrill Lynch shows that value stocks have a history of delivering outsized returns.
 
The study tracked the performance of value stocks and growth stocks over a 90-year period from 1926 to 2016. Over that time growth stocks generated an average annual return of 12.6%, while value stocks delivered an average annual return of 17.0%. The study also found that value also outperformed growth in three out of every five years.
 
If you’re a value investor, don’t despair. I have a secret that many investors are missing right now.
 
While the overall S&P 500 looks overvalued, there are a few hidden sectors that are actually on sale. For example the Financial Select Sector ETF (NYSE: XLF) has a forward PE ratio of 16, a 20% discount to the S&P 500.
 
Within these undervalued sectors are even more undervalued stocks -- global leaders trading at huge discounts to the broader market. If you’re looking for the best and most undervalued U.S. stocks, my list below is a good place to start.
 
The Seven Most Undervalued S&P 500 Stocks
Name Ticker Forward PE Ratio
JPMorgan Chase JPM 13
Verizon VZ 13
Walgreens Boots Alliance WBA 14
Apple AAPL 14
Pfizer PFE 14
Allstate ALL 15
Molson Coors TAP 16
 
These are some of the most powerful and recognized brands in the world. And despite the S&P 500’s high P/E ratio, these companies are on sale. According to history, that increases the probability they will deliver outsized returns.
 
From this list I have chosen to highlight Apple and JPMorgan Chase because of their unique combination of value and growth.
 
Apple (Nasdaq: AAPL) is on pace to become the first trillion-dollar company. Despite this potential landmark, it’s one of the most undervalued stocks in the entire S&P 500. Its forward P/E ratio of 14 is a 30% discount to the S&P 500’s 20. Despite the great value, Apple is set to post major revenue and earnings growth in the next two years. Earnings are on pace to grow 8% in 2017 and another 22% in 2018. 
 
Apple is also transforming into dividend powerhouse. Although its dividend yield of 1.6% is less than the S&P 500’s 2.0%, Apple has raised its dividend by 209% in the last five years. Looking forward, with the largest cash balance in the world, I expect Apple to invest tens of billions into future dividend payments.
 
JPMorgan Chase (NYSE: JPM) is one of the most undervalued stocks in the undervalued financial services sector. JPM’s forward P/E ratio of 13 is a 35% discount to the S&P 500’s 20. Despite that huge discount, JPM offers a compelling combination of growth and income. Its current yield of 2.0% is in line with the S&P 500. And on the growth side JPM is on pace to grow earnings by 10% in 2017 and another 13% in 2018.
 
Risks To Consider: A low P/E ratio can sometimes be a sign of distress. I don’t think that is happening with my list of undervalued stocks, but it’s always important to figure out why a company’s share price is undervalued.
 
Action To Take: Value stocks have a proven history of outperforming the broader U.S. stock market and growth stocks. Even though the S&P 500 is trading with a historically high P/E ratio there are still dozens of stocks that are on sale. My list is a good place to start looking. From that list, Apple and JPMorgan offer the best combination of value and growth.
 
Editor's Note: A few months ago, a group of millionaires and billionaires gathered in a private conference room 26 miles from Mar-a-Lago to discuss their "Trump Era" investments. And believe it or not, a common theme was to invest in American businesses. 7 companies in particular stood out... Full story here.
Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.