This looks like a market throwing out the baby with the bathwater. Take Tuesday trade: 490 of the
inventories are lower after inflation was higher than expected in August.
Most stocks have had a bad year, but not all stocks have deserved the same fate. And many stocks have seen their P/E ratio collapse to seemingly attractive levels.
(ticker: INTC). Shares traded for 15 times their estimated 2023 earnings earlier this year. Now they trade for just 12 times, a slight discount from their recent history. That looks attractive, but profit estimates for 2023 for
have fallen more than 60% in the past six months as the company struggles to bring new chip technology to market. The multiple price/earnings contraction – even with a 41% decline so far – seems at least partially justified.
But Barron’s found a dozen stocks in the S&P 500 that have seen P/E ratios contract, although company fundamentals don’t look too bad. These dozens of stocks could represent new opportunities for investors seeking bargains in the tough 2022 market.
The dozen also includes many familiar names. They are, in no particular order: International Business Machines (
(CFS), cigarette maker
Philip Morris International
(PM), auto parts seller
(DLTR), health insurer
(UNH), agricultural chemical company
(FMC), aerospace and defense giant
(RTX), as well as utilities
Those dozens of stocks have seen their P/E ratios drop about 21% on average, from about 17 times next year’s estimated earnings to just over 13 times. In addition, earnings growth in 2023 is expected to average around 7% compared to 2022 and earnings growth is expected to be positive for all but NRG.
|Name / Ticker||Market capitalization||Price/earnings ratio (2023 estimates)||PE shrinkage %||Year to date|
|IBM / IBM||116.681.867.264||10.2||-22.2%||-3.8|
|CFS Health / CFS||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 fall in valuation, none of the 12 have cut earnings estimates for 2023 in the past six months — instead, analysts have increased estimates over that period by about 4% on average.
There doesn’t seem to be anything wrong with those stocks. Stock prices reflect good news. The dozen are up about 1% on average so far. Still, 1% is nothing to write home about and stock gains haven’t kept up with earnings – which is why P/E ratios have fallen.
Of the 12, Raytheon, UnitedHealth and Humana are the most popular on Wall Street with analyst buy-rating ratios of over 80%. The average Buy rating ratio for a stock in the S&P 500 is about 58%. The least popular stocks with analysts are IBM and Conagra with a buy rating ratio of less than 40%.
This year has brought a frustrating bear market. Hopefully, 2022 frustration will give way to satisfaction in 2023 by yielding some profitable choices. Remember that stock screens are just starting points. They are a good way to narrow down the possible list of new ideas to a manageable level. Developing a full investment thesis comes next.
Write to Al Root at firstname.lastname@example.org