With one of the longest-running bull markets in financial history starting to settle down, now might be a good time to buy individual stocks that once carried a hefty price tag. Most major market averages started 2018 on a tear, making some stocks unaffordable, but prices have now settled. Here are three stocks that are trading at substantial discounts, which could provide some solid long-term returns.
HP (Formerly Hewlett-Packard):
Although HP’s stock price has been performing well lately, many analysts who cover the company believe the price is still cheap. The S&P 500 trades at around 17 to 18 times forward earnings while HP only trades at 12.5 forward earnings. Also, the stock offers a 2.5 percent dividend yield, which is more than 60 basis points more than most dividend-paying stocks in the S&P 500.
The company’s outlook for 2018 is strong indeed. Although some analysts expect an EPS (earnings-per-share) of close to $2, the company’s guidance is for an EPS of $2.60. It is true that HP only offers two business models, printers and PCs, but the revenues from those businesses rose 13 percent and 7 percent respectively in 2018. Analysts who cover the stock believe revenues will rise by 4 percent and 10 percent in 2018. If you want to put an undervalued stock on your watch list, HP is certainly worth a look.
Although auto sales are starting to peak in the U.S., the recent pullback in stock prices might put GM stock in the undervalued category. For one thing, GM’s forward P/E ratio is a ridiculously low seven times forward earnings, and the company offers a dividend yield of 3.5 percent. If you are a passive investor looking for safe returns, the generous dividend yield alone is enough to put GM on your watch list.
Despite the peak in auto sales in the U.S., there is still a growing demand for automobiles overseas. In 2017, GM sold a record 4 million automobiles in China. Analysts also note there is a surge in overseas demand for luxury cars. This could bode well for GM as the company is putting much of its focus on its new line of luxury Cadillacs.
As e-commerce continues to kill the bottom lines of traditional retailers (think Toys R Us), Macy’s remains optimistic about its future. That optimism could lead to some very healthy returns as the stock price starts to stabilize after losing almost 60 percent in value over the past three years.
The company should benefit nicely from the Trump administration’s corporate tax relief since most of Macy’s sales come from the U.S. Think about it, Macy’s paid an effective tax rate of close to 36 percent before tax reform. Under the new tax law, Macy’s will only pay around 20 percent in taxes. If the shares have hit bottom and revenues pick up due to additional working capital, Macy’s is certainly worth a second look if you are a value investor.
Edward Schinik has been with the Investment Manager since 2009 and has been with one Affiliated Investment Manager since 2005.