This looks like a market to throw the baby out with the bath water. Take Tuesday’s trades: 490 of the
Stocks are lower after August inflation was higher than expected.
Most stocks have a lousy year, but not all stocks deserved the same fate. And many stocks have seen their price/earnings collapse to seemingly attractive levels.
(point: INTC). Shares were trading at 15 times estimated 2023 earnings earlier this year. They now trade only 12 times, a slight discount on their recent history. This looks attractive, but earnings are estimated for 2023
have fallen more than 60% in the past six months as the company struggles to bring new chip technology to market. The price/earnings multiple contraction—even with the stock down 41% year-to-date—seems, at least in part, justified.
But Barron’s found a dozen stocks in the S&P 500 that have seen their P/E ratios shrink even though the businesses’ fundamentals don’t look so bad. These dozens of stocks may be new opportunities for investors looking for opportunities in the difficult market of 2022.
The dozen also includes many household names. They are, in no particular order: Engines of International Business (
(CVS), cigarette machine
Philip Morris International
(PM), auto parts dealer
(DLTR), a health insurance provider
(UNH), an agricultural-chemical company
(FMC), an aerospace and defense giant
(RTX), as well as utilities
These dozen stocks have seen their P/E ratios fall about 21% on average from about 17 times next year’s estimated earnings to just over 13 times. Additionally, earnings growth is expected to average approximately 7% in 2023 compared to 2022, and earnings growth is expected to be positive for all but NRG.
|Name / Ticker||Market Cap||Price/earnings ratio (estimates 2023)||% PE contraction||Year to date|
|IBM / IBM||116,681,867,264||10.2||-22.2%||-3.8|
|CVS Health / CVS||134,105,464,832||10.0||-15.8%||-1.4|
|Philip Morris / PM||150,458,859,520||14.5||-16.3%||0.3|
|O’Reilly / ORLY||45,653,753,856||18.5||-14.0%||0.3|
|Conagra / CAG||16,519,183,360||12.3||-14.2%||0.5|
|Dollar Tree / DLTR||32,347,695,104||13.4||-34.2%||0.7|
|FMC / FMC||14,195,609,600||11.5||-21.9%||1.4|
|Raytheon / RTX||129,992,294,400||14.5||-19.2%||1.8|
|Humanna / HUM||60,555,943,936||15.2||-20.8%||1.8|
|NRG Energy / NRG||10,179,519,488||9.6||-32.3%||2.4|
|Edison International / EIX||26,356,951,040||12.2||-23.3%||2.7|
|UnitedHealth Group / UNH||490,458,578,944||17.9||-21.9%||3.2|
Despite the valuation slide, none of the 12 has seen 2023 earnings estimates cut over the past six months — instead, analysts have raised estimates by about 4% on average over that time.
Nothing seems to be wrong with these stocks. Stock prices are reflecting some good news. Dozens are up about 1% year-to-date on average. However, 1% is nothing to write home about, and the stock’s earnings haven’t kept pace with earnings — which is why P/E ratios are falling.
Of the 12, Raytheon, UnitedHealth and Humana are the most popular on Wall Street with analyst buy ratios above 80%. The average market-to-market ratio for a stock in the S&P 500 is about 58%. The least popular stocks with analysts are IBM and Conagra with market-to-market ratios below 40%.
This year brought with it a disappointing bear market. Hopefully, the disappointment of 2022 will give way to the satisfaction of 2023, giving some profitable options. Just remember that the stock screens are just starting points. It’s a good way to narrow the potential list of new ideas down to a manageable level. The following is the development of a full investment thesis.
Write to Al Root at email@example.com