3 Stocks to Consider If Increasing Equity Exposure

Nathaniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Are you one of the many investors who has missed some or all of the great run in the equity markets this year?

Well you're not alone--many retail investors have missed a great deal of the great returns seen over the last couple years. With record highs seen just last week, you may be saying to yourself, isn't it risky to buy up here? The answer is yes. It's is always risky buying the market at highs as historically, the moment when the retail investors start pouring back in, "smart money" is selling while calling the top.

So how can the average investor get involved with the market without risking too much capital? In this article I would like to analyze three companies that are respected leaders within their industries, yet trade at low earnings multiples. A great deal of the run so far this year has been a result of multiple expansions, especially within the housing sector. By looking for names with little premium built into the stock price, you are somewhat protected from moves to the downside as multiple contractions are far less painful.

Into the gray

As I've talked about briefly in some of my recent healthcare articles, our population here in the United States is growing older in combination with increasing life expectancies. One company in particular, Prudential Financial (NYSE: PRU) is positioned well to benefit from the graying generations.

A number of tailwinds are creating the perfect storm for the older generation. The National Research Council recently put out a report in which it predicts that by 2050, life expectancy will rise by almost 7 years to 84.5 years. Moreover, the report predicted the proportion of citizens over the age of 65 will jump by 80% over the next few decades.

So why does this matter for a financial company? Well, Prudential generates a substantial proportion of its revenue from its retirement, asset management, and annuity business segments. 44% of the company's attributed equity comes from two of these segments, annuties and retirement account for 30% and 14% respectively.

At only 9 times forward earnings, Prudential gives investors exposure to a number of industries I expect to perform well over the coming decades including those previously mentioned in addition to insurance. 

Catching a falling knife is risky, but worth consideration

Freeport-McMoRan Copper & Gold (NYSE: FCX), an industry-leading producer of copper, gold, and gas has done especially poor this year in the face of a broad market rally. Shares have moved lower by 16% on the back of weak copper prices and fears of significant demand declines out of China.

Freeport, which trades in high correlation to the underlying price of copper, trades at a forward, and current, price to earnings multiple just under 10 times.

A number of companies with exposure to China, got a bid last week with higher than some had estimated GDP growth. The country reported 7.5% growth during the second quarter, helped by a 13% increase in retail sales, but hurt by worse than expected industrial output. Should we begin to see the fears of an economic meltdown subside, I would expect to see the price of copper and other industrial metals get a bid, thus helping the underlying price of Freeport.

For the long term investor, Freeport offers good exposure to the emerging world for a low valuation. 

Always watch Apple

The Street has been claiming Apple (NASDAQ: AAPL) is a value play since the steep selloff earlier this year. Over the last couple months shares have stabilized somewhat, settling in the low to mid $400 range, and guess what? Shares still look inexpensive by conventional metrics. 

The majority of the sharp declines can be attributed to a deflated price to earnings multiple, not significant earnings declines. While increasing competition may be eating away the company's dominance within the majority of its business segments, the company is truly a value play at these levels considering the enormous stock pile of cash the company holds on the balance sheet.

The dividend yield, currently 2.85%, still beats out the 10 year treasury by over 100 basis points. Should Apple never release a single game changing product ever again, I feel confident in saying it will at least be able to maintain and increase this payout.

However, if one of Apple's rumored products does hit the market, whether it be wearable technology, a cheaper iPhone, or a interactive television, the stock could get a boost.

Lets compare Apple to another old technology value play, Microsoft, which, in comparison, trades at 12 times earnings, 3.43 times book, and for what? A failing surface tablet, steep discounts, and an almost dead PC market. I can find no explanation in why Apple would be trading at a discount when so much potential is still in the tank. 

Wrap-Up

If your looking to get some skin in the game, or perhaps increase your equity investments, after the market has reach new all time highs, you should consider an investment in companies that haven't run on expanding multiples. The three previously mentioned companies all trade at low price to earnings multiples while holding the potential for growth over the long term. 

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, “Apple Will Destroy Its Greatest Product.” Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Freeport-McMoRan Copper & Gold. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure