It's noteworthy that the S&P 500 has risen 28% since Oct. 3, 2011, working out to be a nearly 60% annualized gain. What's even more notable is that almost all of the upside (outside of Apple (Nasdaq: AAPL)) has been in the riskiest end of the market, from heavily-shorted stocks that saw short covering, to stocks that already sported fairly high price-to-earnings (P/E) ratios.
If you've been focusing on safer stocks with lower P/Es, then you may feel like you missed out on the fun. These value stocks have simply not been in focus. But it would be foolhardy to shift gears now. After the very strong run for aggressive growth stocks, the valuation gap when compared with value stocks has rarely been this stark. That's not to say that value stocks are suddenly poised to start appreciating much faster than growth stocks, but it does mean that they should at least hold their own in terms of upside, while offering significantly more downside protection.
I dug into more than 100 stocks in the S&P 500 that are trading for less than 10 times projected 2013 profits. I found three stocks that I think offer an especially compelling combination of low-risk and high-reward.
1. Goodyear Tire & Rubber (NYSE: GT)
Making tires is a straightforward business. When input prices (such as rubber) increase, you simply raise the prices that your customers pay. That's why this tire maker's gross profit margins hover around 17% every year.
The key factor is volume. When car and truck sales slump, demand for tires weakens and gross profits start to get eroded by overhead costs. Yet it works the other way as well. Rising volume could lead to outsized operating profits. That was surely the case for Goodyear in 2011 as a 20% jump in sales to $22.8 billion pushed operating profits from just $8 million in 2010 up to $618 million, or $1.91 a share.