It's cork-popping time on
Wall Street again. The Nasdaq is up 25% in the past six months to levels not seen since 2000, and many individual stocks are up by twice as much. That doesn't mean it's time to sell, but it surely means it's time to approach any fresh investments with a more cautious stance. Chasing high-multiple stocks right now makes little sense, in case we do indeed see profit-taking in the
market.
This should point investors in the direction of low P/E stocks. These stocks could see solid upside if their forward multiple expands, and equally important, more limited downside if the market's mood changes (which, by the way, is exactly the approach I take in my $100,000 Real-Money Portfolio).
The good news: there are still a few dozen stocks in the S&P 500 that trade on the cheap. I've compiled a list of stocks trading for less than 10 times projected 2012 profits and less than 7.5 times projected 2013 profits. Some of these stocks are low-priced for a reason. For example, investors are still focused on the legacy problems at many U.S. banks, and 10 of them in the S&P 500 trade at very low multiples in relation to forward profits. If these banks can hit the mark and earn what they're supposed to, then their stocks may finally start a major upward move.
In a similar vein, a number of insurance stocks trade at low multiples. In this case, the dowdy valuations stem from a low-interest rate environment, which is squeezing their profit margins as investable assets score low returns. When interest rates eventually rise, so will their multiples.
You'll also find a cluster of energy-related stocks on the list of low P/E stocks. Flagging natural gas prices get some of the blame, especially for heavily-indebted names such as Chesapeake Energy (NYSE: CHK).
It's not clear why energy services firm Halliburton (NYSE: HAL), which also has exposure to the more robust oil industry, should be stuck with a low multiple.