December 23, 2024 – (Maple Hill Syndicate) – The market is expensive, investors wail. There are no cheap stocks anymore.
That's not quite true. Yes, the stock market is expensive, with stocks selling at about 24 times earnings. A normal multiple, historically, is about 15. But there are still some cheap stocks around.
To find them, you have to avoid the “Magnificent Seven” investors' darlings, and look outside the technology sector. You have to poke into out-of-favor sectors and industries, notably energy, banks and homebuilders.
As of December 20, there were about seven dozen large-company stocks selling for less than 15 times earnings, five dozen of which had little or moderate debt. Among smaller companies, there are many
more, but for today let's talk about the big companies. Here are six worth considering.
ConocoPhillips
It's smaller than Exxon (XOM, Financial) or Chevron (CVX, Financial), but ConocoPhillips (COP, Financial) is definitely a “major” in the oil patch. It produces oil and gas in 15 countries, notably the U.S., Australia and Norway. Founded in 1875 as
Continental Oil in Utah, it now has headquarters in Houston.
Profits are solid, with a 20% return on stockholders' equity in the past four quarters. The dividend yield is above 3% and there's room to increase it. The stock sells for less than 12 times earnings.
Paccar
If that big truck looming behind you on the highway is a Kenworth or Peterbilt, it was manufactured by Paccar Inc. (PCAR, Financial), which has about a 31% market share in the U.S. heavy truck market.
In assessing profitability, I consider a 15% return on equity good and 20% excellent. Paccar has exceeded 20% in seven of the past ten years. Its stock has roughly doubled in the past five years, but still sells
for just under 12 times earnings.
Schlumberger
One of the big three in oilfield service (along with BakerHughes and Halliburton), Schlumberger Ltd. (SLB, Financial) has seen its stock pounded this year – down 29% through December 20.
In the past 16 years, the price of oil has sporadically spurted above $100 a barrel, but has mostly fluctuated between $50 and $100. It's about $70 at this writing.
I think it will be above today's level for much of the next five years, because of Middle East tensions and because a Republican Congress may slash subsidies for solar and wind.
D.R. Horton
The largest U.S. homebuilder, D.R. Horton Inc. (DHI, Financial) sells homes at almost every price point. Homebuilding is a fragmented industry, and one that's heavily influenced by the prevailing level of interest rates.
Homebuilders soared in July and August, as investors got excited about the prospect of multiple interest-rate cuts by the Federal Reserve. They have given up their summer gains now that it appears the Fed will
move more cautiously. Horton shares sell for only about 10 times earnings.
M&T Bank
M&T Bank (MTB, Financial), based in Buffalo, New York, is one of the larger regional banks in the U.S., with more than 1,000 branches in 12 Eastern states. Its initials originally stood for Manufacturers and Traders Trust Co.
My favorite measure for banks is return on assets, which I like to see above 1%. M&T has achieved this mark in 13 of the past 14 years, and almost certainly will make it again this year. The stock sells for 14 times earnings.
Nucor Corp
The U.S. already protects its steel industry to a substantial degree, with 25% tariffs on imports from many countries. A few countries are exempt, but two of them – Mexico and Canada – have been threatened with broad new tariffs by President-elect Trump.
As the largest U.S. steel company, Nucor Corp. (NUE, Financial) benefits from these restrictions. It has shown a profit for 14 years in a row (ever since the Great Recession ended). The stock, down a whopping 22% this year, sells for only 11 times earnings.
Disclosure: I own D.R. Horton for one or more clients.
Follow-up: A year ago, I observed that the stock market's advance was broadening out, and was no longer confined to a favored few stocks such as the Magnificent Seven. This inspired me to pick a group of stocks I
called the “Regular Seven,” that had recently come to life.
Climbing out on a limb, I speculated that the Regular Seven might beat the Magnificent Seven over the next 12 months. Well, the limb broke.
The Regular Seven returned only 14% from December 15, 2023 through December 20, 2024. The Magnificent Seven surged 63%. Meanwhile the Standard & Poor's 500 Total Return Index (which includes the Magnificent
Seven along with 493 other stocks) returned 26.5%.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
