Large Caps with Small Prices
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the biggest problems for investors looking to put their money into the relative safety of blue chip stocks is that everyone else in the world is trying to do the same thing. Throngs of lemming-like profit seekers congregate to today’s winners, which more often than not become tomorrow’s losers as a result of their inflated prices. Because of this cycle, it is easy to get caught up in the crowd and overpay for popular growth stocks without considering what these companies are actually worth. This is little better (and sometimes worse) than paying a fair price for higher risk investments.
How is one to fight against the very real human instinct to seek safety in numbers? The answer, ironically, is in the numbers. Avoiding overpriced stocks does not necessitate taking higher risks, as there are a number of large-cap (and generally safer) stocks still listed at conservative prices. Let’s take a look at a few examples (for the sake of convenience, I have ignored the entire financial sector, which presently carries a number of underpriced, large-cap stocks):
Xerox (NYSE: XRX)
Xerox has been manufacturing photographic equipment and paper since 1906. Now with a market capitalization of $11.4 billion, it is trading at only .88 times book value and 11 times earnings, about a third less than the industry average. Though the company has a considerable amount of long term debt (over $7 billion), Xerox increased its net income by 17 million from Q3 2010 to Q3 2011 and has paid a stable dividend over the past 30 years.
General Motors (NYSE: GM)
General Motors has had a rough time of it lately with around a quarter of the company owned by the U.S. government after filing for bankruptcy protection in 2009. The upshot is that GM, a company with a $32 billion market cap, is currently valued at .99 times book value and 4.6 times earnings despite reporting a profit for 7 straight quarters.
Valero Energy Corp (NYSE: VLO)
Another large-cap company with a long history of dividend payments, Valero Energy Corp., reported third quarter earnings of $1.2 billion versus $303 million in 2010, its highest earnings per share total since 2007. The company is valued, however, at just 7.45 times earnings and carries a book value of almost $30 per share while inexplicably trading for around $21 a share. There is no reason why this discrepancy should not be corrected.
WellPoint Inc (NYSE: WLP)
Finally, while lacking in glamour as a stock pick, WellPoint Inc. more than makes up for this shortcoming in value. The result of a 2004 merger between Anthem Insurance and WellPoint Health Networks, this health care company has beaten analysts’ earnings estimates for the past 11 quarters. Shares of WLP nonetheless trade under book value with an earnings multiplier of 8.9 and a price/cash ratio of 1.16. Throw in a modest dividend, and WellPoint looks like a deal.
Robert Coleman does not own shares in any of the companies mentioned in this entry.