4 Hot Stocks with Low P/Es as the QE3 Trade Weakens
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pop! The S&P 500 restlessly hovered around the 1430 area for weeks on low volume. Then the Fed’s QE3 announcement pushed it to around the 1460 area, where it calmly sits now. The move is nice for investors who kept their long positions intact, but the anticipation of a continuously rising market puts investors in a dangerous trance.
The all-time high for the S&P 500 ETF (NYSEMKT: SPY) is 157.52. Assuming the Spiders trade at 146.00, the market is just 7.9% off its all-time high, a small gap considering the economy is still finding its identity outside of the Fed’s occasional booster shots.
So what are investors to do? Preferably not initiate any long positions now – earnings may not increase as much as expected, and stocks have traditionally traded at paltry valuations when inflation exceeds interest rates. However, if you must buy in at these prices, here are four stocks that offer low P/E ratios.
|Company||JPMorgan (NYSE: JPM)|
|Quarterly Earnings Increase/Decline||-8.70%|
JPMorgan is arguably the king of Wall Street. The bank’s Chase retail banking arm offers investors security in the form of customer deposits. Moreover, loans from the bank’s commercial lending division and its private wealth division, considered among the best on Wall Street, smooth out the more volatile earnings from investment banking and trading.
As a caution, remember that the financial sector often leads the markets, both up and down. If the market takes a nose dive, JPMorgan could be hit – however, a fall would propose a nice entry point.
|Company||ExxonMobil (NYSE: XOM)|
|Quarterly Earnings Increase (Decline)||49.00%|
ExxonMobil is a leading oil and gas producer. The company has a market cap around $425 billion, and sports cash flow from operations of $55.1 billion, enabling it to withstand negative financial times. Exxon is also the top producer of natural gas in the U.S. and it holds rich gas assets, making it a nice play with natural gas prices trading so low.
The downsides to Exxon include the price of oil, which has taken a run-up from the high $70s to nearly $100. If the market rolls over due to economic concerns, it is also likely that energy demand would decrease, pushing down the price of oil, and thus Exxon’s profits.
|Quarterly Earnings Increase (Decline)||-6.80%|
Like Exxon, Chevron is financially stable. The company has $21.46 billion on its balance sheet, compared to $10.23 billion in debt. And its $38.90 billion in operating cash flow provides a nice cushion for capital expenditures. Also, the firm has a nice mix of upstream and downstream operations. Upstream, the company explores, transports, and stores oil and natural gas. Downstream, the firm refines crude oil into petroleum-based products then markets, transports, and sells them.
The risk with Chevron is similar to that of Exxon. If energy demand falls, its profits will slip as oil prices drop.
|Company||Caterpillar (NYSE: CAT)|
|Quarterly Earnings Increase (Decline)||67.40%|
Caterpillar operates a seemingly endless number of brands that range from solar turbines to financing to remanufacturing, where the company remanufactured 2.2 million units – 161 million pounds of product. The firm is a leading producer in many of its business areas worldwide, and the company remains on the edge of innovation.
A downside is that Caterpillar’s construction equipment-making business is more cyclical. When demand slacks, like it does in downturns, buyers are less likely to purchase new equipment, hurting Caterpillar sales.
What to Do?
According to The Wall Street Journal:
S&P 500 companies turned 9.4 cents of each sales dollar into operating profit last quarter. The average since 1988 is 7.2 cents, and the record, 9.6 cents, came in 2006, near the peak of the housing bubble, says Howard Silverblatt, senior index analyst at S&P.
What does this mean for the markets? Profits are at the high-end of the spectrum and a return to the mean is likely. Analysts expect a 13.4% increase in profits next year, but is that number really sustainable? Maybe. But if it is not, look for the S&P 500 to pull back – despite the Fed’s booster shots.
Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in the Fool’s brand new report. Just click here to access it now.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. and ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.