The Best S&P 500 Stocks You've (Almost) Never Heard Of

James Brumley's picture

Friday, January 20, 2012 - 8:30am

by James Brumley

They rarely make headlines, but that doesn't make them sub-par investments. Indeed, the lack of limelight for some large cap stocks keeps their volatility in check and lets them trade at their actual value rather than at the market's daily whim -- all of the stability of size, but none of the gut-wrenching swings.

Here's a look at three relatively unknown and underestimated names some investors might be surprised to hear are among the United States' biggest companies. Boring can be beautiful in its own way...

1. Sealed Air (NYSE: SEE)
Food wrappers and shrink wrap are hardly the stuff investor's dreams are made of, but it's at least a reliable business. Sealed Air breezed through the recession without any major earnings hits and is still cranking a bottom line comparable to the one it's been posting year-in and year-out for five years now. For perspective, the company has earned $1.68 per share during the past four quarters, compared with earnings of $1.51 per share in 2008. It's been a picture of consistent growth for nearly a decade, even if it's been tepid growth.

The boring nature of the business is playing right into value-seekers' hands, too. Though it's doing nothing dramatic to make it happen, Sealed Air is expected to earn $1.79 per share in fiscal 2012. That translates into a P/E ratio of only 10.6, and ranks the dividend yield up to a respectable 2.9%.

Perhaps it's on the dividend front where this boring consistency means the most. Sealed Air has not only paid a quarterly dividend every year since 2006, it's increased it from $0.075 to $0.13.

2. Jabil Circuit (NYSE: JBL)

Jabil Circuit doesn't cleanly fit into an industry category, which may be why it gets little attention -- neither the media nor the market fully understands all it does, and in this age of "story stocks," this degree of diversity doesn't interest a lot of potential buyers. It should, though.

The company manufactures circuit boards, designs automated assembly lines, handles electronics repair work and more. Its customers include the likes of Hewlett-Packard (NYSE: HP) and Cisco Systems (Nasdaq: CSCO). While its diversified customer and service base may be confusing from a distance, it's that same diversity that Jabil expects to use as a springboard to better days.

The company's Achilles heel up until this point has been paltry net margins, which usually roll in at 2.5% of revenue. While total earnings improved a tad last quarter on a year-over-year basis, things didn't get better on the margin front. Jabil also provided guidance for the current quarter that wasn't any more encouraging.

Investors hated it in late December after the announcement was made, sending the stock lower for a whole three days as a result. After the knee-jerk reaction was completed, the market's attention turned back to something else -- Jabil CEO Timothy Main's new mission to improve margins by improving the company's operating efficiency. And, given the stock's bullish breakout effort this week, investors are finally starting to believe in that initiative, too.

3. Eastman Chemical Co. (NYSE: EMN)
Manufacturing and selling chemicals, plastics and fibers sounds about as exciting as making food wrappers and shrink wrap. In the same way Sealed Air has built a reliable business out of the latter, Eastman Chemical Co. has built a pretty reliable business out of the former. It hasn't been as consistent, however, though even that may be a silver lining.

Eastman Chemical didn't fare well during the 2008 recession, as demand for everything from appliances to signs to construction -- just a few of Eastman's target markets -- dried up. Earnings of $2.25 per share in 2008 became earnings of $1.82 a share in 2009. The bottom line has been in recovery mode ever since, and it's expected to reach $4.64 per share in 2012. Clearly something is changing for the better.

Just as a warning, most of the media's assessment of Eastman isn't an encouraging one. Its cash flow is suspect, and the company recently lowered its full-year (2011) earnings guidance. The market's blown it all off, though, and started to pour back into the stock when its P/E ratio slumped to a meager 4.6 a month ago.

Risks to Consider: The same lack of interest that makes these names underappreciated is the same lack of interest that could potentially keep them that way. If the media's "usual suspects" manage to make even more noise than usual, then it could deflate what little attention these stocks are getting.

The other risk newcomers may find right now is a temporary one. All three of these stocks' charts became a little overbought this week -- particularly Jabil's -- and may be facing some short-term profit-taking pressure.

Action to take --> Of the three, Eastman Chemical may be as overbought in the near-term as the other two, but should be viewed as a bargain after any meaningful dip. It's not often investors can find stocks at sub-6 price-to-earnings ratios, which is where Eastman is priced now, especially after the number of earnings beats the company has posted since 2009. The stock may have a 30%-plus upside waiting for it by the end of the year if it continues to top estimates.

All of these stocks have more than average (and largely unsung) merit, however, and would be easy ways to fill sector-specific or industry-specific gaps in a portfolio.

James Brumley 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.