This article presents seven large-cap stocks that are regarded as cheap based on their price-to-earnings ratio. The price-to-earnings ratio tells an investor how much they are paying per share for every dollar of a company's profit.
You can find a stock's P/E ratio by dividing its stock price by its earnings per share. That looks like this:
P/E Ratio = Stock Price/Earnings per share (EPS)
For example, if a company is reporting earnings of $3 per share and their stock is selling for $30 per share, the P/E ratio is 10 ($30 per share/$3 per share). Many investors will look at a benchmark index like the S&P 500 as their guide for defining if a company's P/E ratio makes a stock cheap or expensive. At the time of this writing, the average P/E ratio for stocks in the S&P 500 was 14x to 17x. That is the range we're using for determining if a stock is cheap.
Of course, what is considered a “good" P/E ratio may depend on the market sector. For example, technology stocks tend to have a higher P/E ratio than the S&P average because they are projected to have stronger earnings and stock price growth than the broader market.
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- Chevron
- Citigroup
- Owens Corning
- United Rentals
- Honda Motor
- BorgWarner
- Pfizer
#1 - Chevron (NYSE:CVX)
Energy stocks are notoriously cyclical which makes P/E ratio an important metric for determining which stocks to buy. Chevron (NYSE:CVX) currently offers a P/E ratio of 10.54. That’s higher than the sector average, but it’s lower than the S&P 500 average.
So why buy CVX stock? At the time of this writing, the price of crude oil is under $100, but it’s not expected to remain there. There are a number of reasons to believe the supply and demand dynamics will remain bullish for oil stocks in 2023.
However, like many traditional oil and gas stocks, Chevron is making significant investments into renewable fuels. The company is currently playing a significant role in transporting liquefied natural gas (LNG) to Europe as the continent looks to wean themselves from Russian oil.
Plus, Chevron is a member of the dividend aristocrat club, meaning it has increased its dividend for at least 25 consecutive years. In addition to being a reliable dividend, it also offers an attractive yield of 3.10% and an annual payout of $5.68 per share.
About Chevron
Chevron Corporation, through its subsidiaries, engages in the integrated energy and chemicals operations in the United States and internationally. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, production, and transportation of crude oil and natural gas; processing, liquefaction, transportation, and regasification of liquefied natural gas; transportation of crude oil through pipelines; transportation, storage, and marketing of natural gas; and carbon capture and storage, as well as a gas-to-liquids plant.
Read More - Current Price
- $161.30
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 13 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $174.93 (8.5% Upside)
#2 - Citigroup (NYSE:C)
Citigroup (NYSE:C) fits the classic definition of a value stock. The bank is currently trading at a P/E ratio of 6.80 which is comfortably below both the S&P average and the sector average.
Critics will say that the company’s low valuation is deserved because the company is in the middle of a transformation plan while navigating through some regulatory issues that stem from its risk management and internal controls. This bearish sentiment is reflected in the stock price which is down 26% in 2022 and is down 31% in the last five years.
However, the stock has recently drawn the interest, and capital, of Warren Buffett. That suggests that the company’s plans may be coming together. Analysts that report to MarketBeat currently give C stock a consensus hold rating. But with a price target of over $58 per share, the stock does look to have some upside. And while investors wait for that growth to come, they can enjoy a dividend that has a yield of 4.11% and a payout of $2.04 on an annual basis.
About Citigroup
Citigroup Inc, a diversified financial service holding company, provides various financial product and services to consumers, corporations, governments, and institutions worldwide. It operates through five segments: Services, Markets, Banking, U.S. Personal Banking, and Wealth. The Services segment includes Treasury and Trade Solutions, which provides cash management, trade, and working capital solutions to multinational corporations, financial institutions, and public sector organizations; and Securities Services, such as cross-border support for clients, local market expertise, post-trade technologies, data solutions, and various securities services solutions.
Read More - Current Price
- $68.28
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $73.00 (6.9% Upside)
#3 - Owens Corning (NYSE:OC)
Owens Corning (NYSE:OC) makes this list for its aspirations to be a significant player in the circular economy. The circular economy is a model of production and consumption in which materials, products, and services remain in circulation as long as possible to reduce waste.
For its part, Owens Corning recently announced plans to recycle two million tons of shingles per year in the United States by 2030. The recycled shingles will be used to create new shingles as well as to create asphalt paving.
With climate considerations likely to remain on the front burner for the foreseeable future, now is a time to consider a company like Owens Corning which will benefit as businesses look to design sustainable structures.
And Owens Corning currently meets the definition of a value stock. OC stock trades at a P/E ratio of just 6.74 which is below both its sector average as well as that of the S&P 500.
About Owens Corning
Owens Corning manufactures and sells building and construction materials in the United States, Europe, the Asia Pacific, and internationally. It operates in three segments: Roofing, Insulation, and Composites. The Roofing segment manufactures and sells laminate and strip asphalt roofing shingles, oxidized asphalt materials, and roofing components used in residential and commercial construction, and specialty applications.
Read More - Current Price
- $194.27
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $192.62 (0.9% Downside)
#4 - United Rentals (NYSE:URI)
If sustainability is one of your primary investing motivations, United Rentals (NYSE:URI) is another company to have on your watchlist. The premise is that renting equipment creates a more sustainable economy that supports the sharing economy.
Analysts are also optimistic about the company’s recent acquisition of Ahern Rentals. The $2 billion cash purchase required the company to borrow $1.5 billion in a higher interest rate environment. Nevertheless, the acquisition is considered a growth catalyst and many analysts are raising their price targets for URI stock.
United Rentals is expected to grow revenue at around a 7% rate with earnings per share (EPS) expected to grow at an even more impressive rate of 15%. Currently, URI stock trades at a P/E ratio of 13.16% and unlike many stocks United Rentals is up 7% in 2022.
About United Rentals
United Rentals, Inc, through its subsidiaries, operates as an equipment rental company. It operates in two segments, General Rentals and Specialty. The General Rentals segment rents general construction and industrial equipment includes backhoes, skid-steer loaders, forklifts, earthmoving equipment, and material handling equipment; aerial work platforms, such as boom and scissor lifts; and general tools and light equipment comprising pressure washers, water pumps, and power tools for construction and industrial companies, manufacturers, utilities, municipalities, homeowners, and government entities.
Read More - Current Price
- $820.25
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 4 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $751.67 (8.4% Downside)
#5 - Honda Motor (NYSE:HMC)
I’ll admit that Honda Motor (NYSE:HMC) has not come up on my list of electric vehicle (EV) stocks I’ve written about. That’s because the company isn’t planning on pivoting away from hybrid vehicles anytime soon. Honda says it is still pushing to have a 100% electrified fleet by 2040. But in this case, “electrified” does not distinguish between all-electric and hybrid models.
However, the company made some recent announcements that outline the company’s plans to compete in the EV space. One of those will be a focus on solid-state batteries. That will be part of the $40 billion the company is investing over the next decade in an effort to deliver 30 battery-electric vehicles (BEVs).
Honda will be attempting to thread a needle with many manufacturers committed to exclusively producing BEVs. But if Honda is correct in its assertion that hybrids may still rule the market for some time, than HMC stock, which currently trades at a P/E ratio of just 7.75, may look like a bargain.
About Honda Motor
Honda Motor Co, Ltd. develops, manufactures, and distributes motorcycles, automobiles, power, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product and Other Businesses.
Read More - Current Price
- $26.19
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#6 - BorgWarner (NYSE:BWA)
Another way to invest in the EV industry is through a company like BorgWarner (NYSE:BWA). The company has been a key parts supplier to the automotive industry. In 2021, BorgWarner generated $350 million in the EV sector. And the company expects that number to grow rapidly.
By 2025, they are forecasting one in four dollars of revenue, equal to $4.5 billion will come from the EV sector. If analyst estimates are accurate, that will boost earnings by double-digits over the next five years. And by 2030, BorgWarner expects that nearly 50% of its sales will be to the EV industry.
In preparation for that, the company recently committed to invest $500 million in Wolfspeed Inc. – a semiconductor makes that will be a vital link in the company’s supply chain which spans 93 facilities in 22 countries.
BWA stock currently trades at a P/E ratio of 12.18%.
About BorgWarner
BorgWarner Inc, together with its subsidiaries, provides solutions for combustion, hybrid, and electric vehicles worldwide. It offers turbochargers, eBoosters, eTurbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, smart remote actuators, powertrain sensors, cabin heaters, battery modules and systems, battery heaters, and battery charging.
Read More - Current Price
- $33.31
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $41.21 (23.7% Upside)
#7 - Pfizer (NYSE:PFE)
Events such as the Covid-19 pandemic tend to have ripple effects that aren’t appreciated for many years. That’s why Pfizer (NYSE:PFE) is an intriguing buy for 2023 and beyond.
Yes, the company will still be a significant company when it comes to delivering a sufficient supply of Covid-19 vaccines. But, as controversial as the company’s use of mRNA technology may have been, it is likely to become a standard way of developing treatments for a range of medical conditions. And in September, Pfizer initiated a Phase 3 study for an influenza vaccine based on mRNA.
And that is only part of the company’s pipeline which includes 112 candidates with 27 in Phase 3 trials.
PFE stock currently trades with a P/E ratio of 9.45% and, unlike many biotechs; the company has sufficient earnings to issue a dividend which currently has a yield of 3.26%. And with a payout ratio of just over 30%, that dividend looks pretty secure – and likely to continue growing.
About Pfizer
Pfizer Inc discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products in the United States, Europe, and internationally. The company offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic, migraine, and women's health under the Eliquis, Nurtec ODT/Vydura, Zavzpret, and the Premarin family brands; infectious diseases with unmet medical needs under the Prevnar family, Abrysvo, Nimenrix, FSME/IMMUN-TicoVac, and Trumenba brands; and COVID-19 prevention and treatment, and potential future mRNA and antiviral products under the Comirnaty and Paxlovid brands.
Read More - Current Price
- $24.95
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $32.92 (32.0% Upside)
The price-to-earnings ratio is considered one of the benchmark metrics for analyzing stocks, but it does have its limitations. The primary limitation being that it only reflects a moment in time. Many investors will choose to look at a company's price-to-earnings growth (PEG) ratio as a supplementary metric.
The PEG ratio divides a stock's P/E ratio by the anticipated growth rate in its earnings per share. This gives investors an idea of how much growth investors can expect from a stock in years to come.
During bull markets, P/E ratios tend to get inflated as investors bid stocks higher. So it's important to make sure that you look at a stock's P/E ratio in relation to other stocks in its sector. However, you should be careful to not exclude a stock simply because it has a higher P/E ratio than the sector average because sometimes these stocks merit that ratio because they are considered best in class.
However, in bear markets P/E ratios drop as stocks move back to historically normal levels. This is why investors should hunt for stocks with low P/E stocks in market downturns because these will frequently be more attractive to investors.
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