Understanding the Cheapest Stocks in the S&P 500: A Conservative Investment Perspective

The U.S. stock market is currently home to a selection of companies that stand at the bottom of the barrel in terms of price-to-earnings (P/E) ratios. With the overall S&P 500 index trading at a staggering 25 times projected earnings, it’s no wonder that seasoned investors are looking closely at the outliers that range between four to eight times projected earnings. These cheap stocks — which include two car makers, a leading drugstore, and a television broadcaster among others — might raise eyebrows but also present genuine opportunities for those who understand the traditional fundamentals of investing.

The Landscape: Generational Predictive Indicators

The current investment environment bears a striking resemblance to the precarious atmosphere of 1999, just before the dot-com bubble burst. As noted by Ben Inker, co-head of asset allocation at GMO, back then, a diverse portfolio was expected to yield paltry returns—only 2% after inflation. Fast forward to today, where David Kostin of Goldman Sachs predicts even dimmer prospects, estimating a mere 1% annual return over the next decade after inflation, based largely on the CAPE (Cyclically Adjusted Price-to-Earnings) ratio. To emphasize, the current CAPE is higher than it was before the catastrophic market crash of 1929 and nearly mirrors that of 2000.

Cheaper Stocks: A Safe Harbor in Turbulent Waters

For those sensible investors seeking refuge from the high valuations of the broader market, the stocks at the lower end of the P/E spectrum might look enticing. However, looking solely at P/E ratios can be a double-edged sword. In fact, the S&P 500 minus the so-called “Magnificent Seven,” which are often overpriced juggernauts in the tech sector, still appears notably expensive. As investors scrutinize cheaper stocks, they must proceed with caution and consider value-focused investment strategies that offer deeper insights into company fundamentals.

According to data from GMOs Benchmark-Free Allocation strategy, many U.S. stocks are trading at unaffordable premiums compared to global counterparts. This begs the question: should long-term investors consider allocating funds towards cheaper overseas stocks for a broader diversification in their portfolios?

Spotlight on the Cheapest Stocks

As we explore the list of the 10 cheapest stocks in the S&P 500, it is crucial to understand that these companies may not solve their challenges overnight. However, investing in undervalued stocks can yield positive surprises over time, propelling upside return potentials that far exceed their initial appearances.

The Current Top Contenders

• Viatris: Trading at 4.4 times earnings, Viatris is notable as the cheapest stock in the S&P 500. This company, formed from the merger of a Pfizer spinoff and Mylan, possesses substantial free cash flow of over $2.3 billion annually. However, growth remains an elusive target.
• General Motors (GM): At 5.3 times earnings, GM has shown rapid price appreciation in response to recent consumer strength signals. Despite this, it faces significant hurdles in pivoting towards electric vehicles.
• Ford: With a P/E of 5.9 times, Ford is grappling with the electric vehicle transition, yet its upcoming earnings report could clarify its direction.
• BorgWarner: This auto parts supplier, with a P/E ratio of 8.3, finds itself in the favorable position of servicing both electric and traditional vehicles.
• Walgreens Boots Alliance: Marked by an earnings free-fall and operating at 6.5 times earnings, this drugstore chain faces intense competition from online retail giants.
• Everest Group: At 6.5 times earnings, this reinsurer is exhibiting solid profit trends, despite market worries related to climate change.
• Paramount Global: Trading at 7.3 times earnings, Paramount strives to revive its segments despite the steep competition it faces.
• Apache and Devon Energy: The oil drillers, trading at 6.5 and 8.2 times earnings respectively, are grappling with declining crude oil prices and global economic pressures.
• United Airlines: Despite surging to a P/E ratio of 7.3 times earnings, United’s competitive advantage may become pronounced in light of transformation within the industry.

Conclusion: Value Investing in a Conservative Framework

Investors, especially those with conservative viewpoints, need to approach the current market with vigilance. The cheapest stocks in the S&P 500 offer an enticing entry point; however, a thoughtful assessment of each company’s prospects is necessary. By focusing on traditional financial principles, investors can navigate these murky waters, optimizing their portfolios and potentially reaping substantial rewards in the long run.