The trend of growth-stock investing is gaining momentum, leading many value investors to diversify their portfolios by including growth stocks such as Alphabet, Meta Platforms, and even Netflix.
While investing in deeply undervalued stocks is not as popular, there are compelling reasons to consider companies with low price/earnings multiples.
These undervalued stocks can offer a margin of safety and potential appreciation if companies meet earnings estimates and their stocks are revalued. Recently, Barron's conducted a screening of the S&P 500 for the 10 cheapest stocks based on 2024 price/earnings ratios.
These stocks trade for just four to seven times projected earnings, significantly lower than the index's average of about 21.
Among the top picks were three major airlines—Delta Air Lines, United Airlines Holdings, and American Airlines Group—along with General Motors and Ford Motor.
The other five stocks on the list were Viatris, a generic drug manufacturer; Synchrony Financial, a credit card company; Everest Group, a leading reinsurer; Walgreens Boots Alliance, a drugstore chain and healthcare provider; and APA, an oil and gas company formerly known as Apache.
Historically, airlines have traded at low valuations due to profit volatility and financial leverage. However, major carriers are currently trading at attractive prices and are distancing themselves from low-cost rivals.
For instance, United is trading at around $43, making it the cheapest stock in the S&P 500, with a price-to-earnings ratio of four based on estimated 2024 earnings.
American Airlines and Delta are also trading at around four and six times earnings, respectively.
Delta recently highlighted a 15% free cash flow yield and the prospect of record trans-Pacific travel this summer, indicating a strong recovery in corporate travel.
United CEO Scott Kirby noted that the airline is now a top-tier choice for premium travelers, domestic road warriors, and price-conscious leisure travelers.
Meanwhile, American Airlines is working to close the gap with its competitors.
General Motors has seen a 10% rally this year to around $40 per share but continues to trade at little more than four times projected 2024 earnings.
CEO Mary Barra believes the stock is undervalued, as evidenced by the company's $10 billion share buyback in late 2023.
Everest Group, a major Bermuda reinsurer, was recommended earlier this year by value investor Scott Black for its financial strength and low valuation, trading at just six times projected 2024 earnings.
Walgreens has made significant changes under its new CEO Tim Wentworth, including cutting the company's dividend by nearly 50% to 25 cents per share.
The stock, trading around $21, yields just under 5%. Wentworth's challenge is to address challenges in the pharmacy business, reduce costs, and improve the profitability of the company's healthcare businesses, including medical clinics.
APA has underperformed its energy and production peers following its acquisition of Callon Petroleum in early 2024.
The stock, trading around $31, is valued at just seven times projected 2024 earnings, reflecting a cautious approach from Wall Street.
Viatris, a leading generic drug maker, expects to generate at least $2.3 billion of free cash flow this year, with plans to return half of that to shareholders in dividends and buybacks.
The company's market value is approximately $14 billion, and it pays a 4% dividend.
Synchrony Financial, a major issuer of private-label credit cards, has a lower-end customer base compared to some of its peers.
The stock, trading around $42, is up 12% this year and near a 52-week high, but trades cheaply at around seven times this year's expected earnings.
Synchrony Financial has bought back 40% of its stock since 2016 and now pays a 2% dividend, aiming for double-digit annual growth in earnings per share.