Given the uncertain outlook for the U.S. economy as the country continues to struggle with containing the COVID-19 outbreak that has caused the deaths of nearly 135,000 Americans since March, novice market watchers might think that U.S. equities would be tanking.
With the S&P stocks now trading at an average of around 28 times earnings, even while the index itself is just a fraction below the break-even line for the year, a novice might ask if now’s the time to buy the laggards. After all, a rising tide (eventually) lifts all boats.
A rising tide can do only so much, though. A stock may be trading at low multiples for a reason, and it takes some digging to figure out if the company’s got a plan to lift itself up or whether it’s going to continue sinking.
Here’s a look at seven stocks that currently trade below the S&P average, most of them well below. On one hand, looking at standard metrics like earnings per share estimates for this year is unlikely to tell investors much. In the short term, 2020 is a lost year.
On the other hand, looking at where these stocks are forecast to be in 2021 could reveal some gold among the dross.
Harley-Davidson
On Thursday, Harley-Davidson Inc. (NYSE: HOG) got a boost when Wedbush analyst James Hardiman upgraded the stock from Neutral to Outperform and raised his price target from $27 to $36. At Thursday’s closing price of $29.66, Hardiman’s target implies an upside of 21.4% on Harley stock. According to Hardiman, availability can’t keep up with demand. The company also has announced a major cost-saving effort.
Shares have traded in a 52-week range of $14.31 to $40.89, and at the most recent closing price, the stock trades at more than 9% above its consensus target and 6.9% below its 52-week high. Looking ahead, the stock is valued at around three times expected 2021 earnings. Harley pays a dividend yield of 0.28%, or $0.08 annually.
Gilead Sciences
Outside of Remdesivir, the first drug to get emergency authorization from the FDA for treating COVID-19, Gilead Sciences Inc. (NASDAQ: GILD) has not had that much good news. Upside in the stock is based on Gilead’s pipeline of new products, including a CAR-T cancer treatment. Analysts at RBC recently added the company to its list as a top environmental, social, and governmental (ESG) theme stocks with price target of $88 a share.
The company’s stock closed at $76.64 on Thursday, just 5.2% below its 12-month price target of $80.67. At that price, the stock is valued at around 12 times estimated earnings in 2021. Gilead pays an annual dividend of $2.72, yielding 3.85%.
Kroger
Kroger Co. (NYSE: KR) got a boost earlier this year when Warren Buffett’s Berkshire Hathaway revealed that it had added a sizable chunk of the company’s stock to its portfolio. That boosted the stock to a year-to-date gain of just over 17%, where it has more or less remained ever since. Buffet likes stocks that are fundamental to people’s lives, and there are few things more basic than food.
Kroger stock has traded in a 52-week range of $20.70 to $36.84, and at Thursday’s closing price of $33.73, the implied upside to the 12-month price target of $35.83 is 6.2%. The stock’s multiple for 2021 is about 13.9 times expected earnings. Kroger pays an annual dividend of $0.72 for a yield of 2.13%.
Intel
Intel Corp. (NASDAQ: INTC) stock added a third to its share price last year, a significant achievement for a $250 billion company. While the company has lost ground in fabrication technology to both Samsung and TSMC, the company still attracts a lot of investors. Demand for new PCs and laptops driven by COVID-19 stay-home orders certainly have helped the stock, but once it works out its manufacturing issues (expected by next year), the world’s largest semiconductor company is likely to shine again.
At Thursday’s closing price of $59.14, the stock traded about 6.8% below its 12-month price target. Looking ahead, shares are valued at about 13 times 2021 expected earnings. Intel pays an annual dividend of $1.32, for a yield of 2.24%.
Essential Utilities
In March, Essential Utilities Inc. (NYSE: WTRG) completed its acquisition of Peoples, a natural gas distribution company, adding about 5 million gas customers to its rolls. Like most utilities, the COVID-19 outbreak sent shares plunging, to trade down about 30% for the year to date. The stock has regained about half the loss and is once again a solid defensive play.
Shares closed at $43.88 on Thursday, nearly 10% below its consensus price target of $48.20. Based on earnings estimates for 2021, the shares are trading at a multiple of 29 times forward earnings, even though they remain more than 54% below its 52-week high. Essential pays an annual dividend of $0.94 and a yield of 2.18%.
Bank of America
Earlier this week, Bank of America Corp. (NYSE: BAC) reported that second-quarter earnings had dropped by half due to the coronavirus outbreak. Even socking away an additional reserve of $4 billion is not expected to threaten the bank’s dividend. The Federal Reserve could change its mind, of course, if the economy does not recover, but this is still one of the best-run banks among the majors.
Based on Thursday’s closing price of $23.93, the big bank’s stock is trading nearly 20% below its 52-week high. With a price target of $28.53, analysts are looking at multiples of 13 times earnings in 2021. The bank’s dividend yield is 2.93%, and it pays $0.72 per share per quarter.
GM
General Motors Co. (NYSE: GM) has been a major disappointment in 2020, even though new car sales were already expected to be lower than last year. Automakers were hit by a shutdown of their factories and the effects of lockdowns that kept customers out of dealer showrooms. Earnings are now expected to be nearly 80% lower than last year. In an effort to conserve cash, the company has suspended its dividend, but that may present an opportunity to purchase the stock at a bargain price.
The stock closed at $26.85 on Thursday, more than 35% below its 12-month consensus price target. Looking ahead, the stock is valued at around nine times expected 2021 earnings.
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