Buying S&P 500 stocks on the cheap isn't a winning way to make money in stocks long term. But that doesn't stop some investors from trying anyway.
Analysts think nine stocks in the S&P 500 Pure Value index with the lowest valuations, including Dish Network, Western Digital and Ford Motor are due to gain 40% or more in the next 12 months, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
This is noteworthy, as these are members of the S&P 500 Pure Value index, which only holds the lowest valuations in the S&P 500. But that's not all. These stocks also sport the lowest price-to-trailing earnings ratios among all the holdings in the value index. All trade for less than half the average 17 times earnings in the past 12 months. That makes them the cheapest of the cheap S&P 500 stocks.
And right now, cheap is in.
S&P 500 Value Outperforms Growth
Investors are threading the needle this year. On one hand, they're avoiding overpriced, high-growth stocks due to rising interest rates. But they don't like money-losing companies, either.
And that's very clear with the SPDR Portfolio S&P 500 Value ETF. It's only down 15.7% this year. That easily tops the 29.2% drop in the SPDR Portfolio S&P 500 Growth ETF.
Rising interest rates change the math when it comes to growth. When you can get 2% from your cash just putting it in a savings account, you're all that more impatient to get a return on your money. And 8% annualized inflation, too, makes investors less willing to just buy a money-losing growth firm and wait.
But what kinds of value still offer opportunity?
Value With Opportunity In S&P 500
One of the problems with value stocks this year is that many ran up so much already, they're hardly cheap anymore.
Insurer Progressive is a good example. Shares of the insurance company are still in the S&P 500 Pure Value index. But shares are up more than 17% this year and trade for more than 85 times their adjusted trailing earnings. That's hardly a value opportunity anymore. As a result, analysts think the stock is already trading 1% above what the shares should be worth in a year's time.
For opportunity, you must dig deeper. Take satellite communications firm Dish Network. Shares of the S&P 500 Pure Value stock are down more than 54% this year to 14.79. And that's brought the shares' P-E to less than five times trailing earnings. But analysts are saying this cheapo stock is worth 42.24 in 12 months. If right, that would mean nearly 190% upside.
Computer storage company Western Digital is another example. Shares are off 48% this year to 34.05. That gives the stock a P-E of just 7.2. And yet, analysts think this stock has nearly 60% in implied upside in the next 12 months.
To be sure, analysts are wrong plenty of times. They've been pounding the table for Ford and also General Motors for that matter, only for both stocks to sink further. GM's stock is down more than 40% this year, while Ford is off 45%.
Sometimes you get what you pay for.
Cheapest S&P 500 Stocks Analysts Like
Most implied 12-month upside in S&P 500 Pure Value stocks with lowest P-E ratios
| Company | Symbol | P/E (trailing) | Upside to analysts' target | Sector |
|---|---|---|---|---|
| DISH Network | 4.6 | 185.7% | Communication Services | |
| General Motors | 6.2 | 60.0% | Consumer Discretionary | |
| Western Digital | 7.2 | 57.9% | Information Technology | |
| Organon | 5.5 | 55.3% | Health Care | |
| Mohawk Industries | 6.3 | 55.2% | Consumer Discretionary | |
| Paramount Global | 4.0 | 48.3% | Communication Services | |
| Ford Motor | 4.0 | 46.5% | Consumer Discretionary | |
| Intel | 5.8 | 45.8% | Information Technology | |
| Lumen Technologies | 4.0 | 42.6% | Communication Services |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
