Bargain Hunting For The Holidays

12/19/2016


The holiday season tends to bring out the bargain shoppers. But with the S&P 1500 Index wrapping up its eighth straight year of gains, it's getting tougher for investors to find decent deals.

The average S&P 1500 stock trades at 24 times trailing earnings, above its five-year average of 22 and 10-year average of 21, as shown in the table below. None of the sectors looks particularly cheap.

RICHLY VALUED
Stocks look expensive across the S&P 1500 Index relative to historical norms. The only sector with an average trailing P/E ratio below its five- , 10- , and 20-year average is financials — likely due to pricier real estate stocks leaving financials in favor of their own sector earlier this year. Stocks with P/E ratios above 75 and below zero were excluded from this study.
-------------- Average Price/Earnings Ratio --------------
S&P 1500 Sector
Current
3
Years
5
Years
10
Years
20
Years
Consumer discretionary
21.0
21.0
20.6
19.6
20.0
Consumer staples
23.6
23.4
21.8
19.7
20.9
Energy
28.1
19.4
19.2
18.5
20.6
Financials
20.0
21.3
21.5
20.8
19.3
Health care
25.9
28.2
25.6
23.3
25.3
Industrials
23.0
21.1
20.3
19.5
20.5
Materials
23.6
21.6
20.7
19.5
20.4
Real estate
32.1
NA
NA
NA
NA
Technology
28.6
26.9
25.7
24.7
27.8
Telecom services
33.7
26.1
25.8
22.9
23.0
Utilities
21.4
19.2
18.5
17.2
17.0
S&P 1500 Index
24.0
22.8
22.0
20.8
21.4
NA Not available due to insufficient data.

In this richly valued market, we identified stocks that appear unusually cheap relative to peers, shown in the table below. All have trailing P/E ratios at least 10% below their sector average and trade at a steeper discount to peers than they have averaged over the past three, five, and 10 years. Two of the stocks are reviewed below:

Alaska Air Group's ($86; ALK) stock has delivered a 9% total return this year. Yet the shares trade at just 12 trailing earnings, 48% below the average for the S&P 1500 industrials sector — an abnormally large discount. Alaska Air has averaged a 38% discount to its sector over the past five years and a 41% discount over the past decade.

Alaska Air has completed its $2.6 billion acquisition of Virgin America ($57; VA) after winning approval from regulators and settling a consumer lawsuit concerning the deal. Integration risks remain, and the company could face the prospect of higher fuel prices in 2017. But analyst estimates seem likely to turn higher now that the deal is complete. Also encouraging, U.S. airlines should see 3.5% higher holiday travel this year, estimates industry group Airlines for America. Alaska Air is a Buy and a Long-Term Buy.


Kroger ($35; KR) shares have performed poorly this year, as lower food prices weigh on operating growth. During its Dec. 1 earnings call, Management said deflation will likely persist through the first half of 2017. But Kroger has rallied 7% since the report, ahead of the S&P 1500 Index's 3% gain, signaling that investors are starting to focus on the light at the end of the tunnel.

Kroger's stock looks unusually cheap at 16 times trailing earnings, a 34% discount to the average S&P 1500 consumer-staples stock. The stock has traded at an average of 24% below its sector over the past three years. Kroger is a Buy and a Long-Term Buy.

TOP PICKS FROM THE BARGAIN BIN
The following recommended stocks look unusually cheap versus their sectors. For example, Carnival ($52; CCL) has a trailing P/E ratio of 16, a 23% discount to the S&P 1500 sector average. The stock has traded at an average premium of 16% to its sector over the past three years and an 11% discount over the past decade.
Trailing P/E Ratio
Discount (Premium) To Sector Average
12-Month
EPS
Change
(%)
Est. EPS
Change,
Next 12
Months
(%)
YTD
Total
Return
(%)
Company (Price; Ticker)
Stock
Sector
Average
Current
(%)
3-Year
Average
(%)
5-Year
Average
(%)
10-Year
Average
(%)
S&P 1500
Sector
Alaska Air ($86; ALK)
12
23
48
37
38
41
21
(8)
7
Industrials
Amgen ($149; AMGN)
15
26
46
34
32
33
15
4
(8)
Health care
Applied Materials
($32; AMAT)
21
29
27
13
14
19
34
39
72
Technology
Biogen ($286; BIIB)
16
26
40
4
(12)
(9)
19
3
(7)
Health care
Carnival ($52; CCL)
16
21
22
(16)
(4)
11
78
9
(4)
Cons. discretionary
CBS ($64; CBS)
16
21
24
17
16
16
24
10
35
Cons. discretionary
Centene ($56; CNC)
14
26
44
17
11
23
32
17
(15)
Health care
Citrix Systems
($90; CTXS)
26
29
11
(18)
(31)
(34)
73
(1)
20
Technology
CVS Health
($79; CVS)
15
24
35
11
12
10
16
3
(19)
Consumer staples
Disney ($104; DIS)
18
21
18
2
6
12
14
4
(1)
Cons. discretionary
F5 Networks
($144; FFIV)
26
29
10
3
(4)
(20)
9
13
49
Technology
Ingersoll-Rand
($78; IR)
18
23
21
12
13
18
17
3
40
Industrials
Kroger ($35; KR)
16
24
34
24
29
25
7
(1)
(17)
Consumer staples
Mohawk Industries
($200; MHK)
16
21
22
4
(10)
0
25
9
5
Cons. discretionary
Owens Corning
($54; OC)
14
23
37
9
1
(4)
35
(1)
14
Industrials
Southwest Airlines
($49; LUV)
13
23
43
19
10
2
32
(12)
14
Industrials

 


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