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In the S&P 500 communications sector, AT&T is one of the cheapest stocks.
Bloomberg/David Paul Morris
After a huge rise to record highs for major indices, stocks with high valuations are plentiful today. However, there are still areas of the market that appear to be bargains. Investors must assess whether the discount is justified—or whether it represents a chance for future gains. Even in the most expensive sectors of the market, such as technology or consumer discretionary, there are companies that trade for significant discounts to the market.
The S&
Wall Street analysts’ consensus projections for 2022 per-share earnings are 20.6 times.
The three cheapest stocks in each of the 11 S&P 500 sectors are as follows:
*P/2022E FFO *P/2022E FFO *P/2022E FFO
Bloomberg is the source of this information.
(If you are having trouble viewing the table above, please go here.)
Hewlett Packard Enterprise is a business unit of Hewlett Packard.
(NYSE: HPE),
Micron Technology is a type of semiconductor.
(MU), as well
Western Digital is a digital storage company based in
(WDC) are all trading at less than 8 times next year’s expected earnings, compared to the tech sector’s average price-to-earnings of 29 times in 2022. That’s a significant difference, but it’s not ridiculous. Infrastructure-focused computing Many of the computer sector’s software-as-a-service leaders boast quick sales growth and large profit margins, but Hewlett Packard Enterprise does not. The firm, which branched out from the PC and printer industries,
HP Inc. is a technology company based in California.
(HPQ), which was founded in 2015, has only seen one quarter of top-line growth since its most recent quarter in 2018. Before giving the stock credit in the form of a higher valuation multiple, investors will want to see that become a trend. Micron and Western Digital both sell memory chips in a highly cyclical industry, with periods of strong demand and sales typically followed by periods of oversupply and lower pricing. The industry is currently experiencing a period of expansion. Memory stocks are low, and customers are paying up, after a year of working from home raised demand for PCs, smartphones, and cloud infrastructure. Micron is expected to post near-record earnings per share in fiscal 2022, which ends in August, according to analysts, but the stock price hasn’t kept up. That’s what cyclical stocks are prone to: Investors fear that things are as good as they can be and that the current level of earnings will not be sustainable as the cycle progresses. As a result, multiples fall approaching the top of the cycle. As a result, Micron and Western Digital stocks appear to be less expensive than they are. In the much more expensive consumer discretionary sector—home to the likes of
Amazon.com
(AMZN) and (AMZN)
Tesla
(TSLA)—all homebuilders are among the cheapest stocks:
PulteGroup
(PHM),
Lennar
& (LEN)
D.R. Horton is a fictional character created by D.R. Horton
(DHI). Once again, cyclicality is to fault. The housing market is smashing records and hitting multiyear highs left and right, and it’s unlikely to slow down in the medium to long term. As a result, investors are pricing those three homebuilder stocks at peak-cycle multiples, all of which are less than eight times expected earnings next year. A couple of recent pharma-company spinoffs are the cheapest stocks in the S&P 500 across sectors:
Viatris
(VTRS) was ejected from
Pfizer
(PFE) combined with Mylan last year, and
Organon
(OGN), which was just delisted from Merck (MRK). They’re both brand-new equities with generic-sounding names, which has likely kept them out of the eyes of non-healthcare investors. While analysts have been cautious about Viatris’ long-term development prospects, Organon, a recent Barron’s stock choice, has a lot to like. Compared to the healthcare sector’s 26.3 times, the two trade for only 3.9 times and 5.3 times next year’s earnings, respectively. The communications services sector of the S&P 500 is dominated by corporations like
(FB),
Alphabet
(GOOGL), as well as
Netflix
(NFLX)—all very expensive stocks with strong and long-term growth prospects. Meanwhile, a pair of companies in the midst of business transformations are at the bottom of the sector by valuation:
AT&T
(T) as well as
Discovery
(DISCA). Both are trading at roughly 9.5 times next year’s earnings, compared to the sector’s average of 23.5 times. Earlier this year, the two companies decided to merge their WarnerMedia subsidiaries, allowing AT&T to focus on its wireless and wired communications businesses while the merged Discovery/WarnerMedia pursues the worldwide streaming entertainment opportunity.
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The market reacted with suspicion, and AT&T’s projected dividend decrease enraged the stock’s shareholder base, which is heavily weighted with income investors. Both companies will have a lot to prove to investors, and each will face deep-pocketed competitors and other obstacles. However, their equities are less of a lift for contrarian investors due to their low valuations. Real estate is the most expensive of the S&P 500’s 11 sectors, trading at over 69 times anticipated earnings in 2022. However, because real estate investment trusts are often valued primarily on their funds from operations, or FFO, this is misleading. This accounts for depreciation and property sales, focusing on the cash generated by a REIT’s properties. On average, real estate equities in the S&P 500 trade for around 22 times next year’s P/FFO. According to that criterion, the sector’s cheapest stocks are
Simon Property Group is a real estate development company based in
(SPG),
Weyerhauser
Wyoming (WY), and
CBRE Group is a real estate firm that specializes in
(CBRE)—are all selling for 13 times or less their expected FFO in 2022. To contact the editors at Barron’s, send an email to editors@barrons.com./n
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