4 Cheap Stocks in an Expensive Market

Source: https://www.flickr.com/photos/30405858@N05

Source: https://www.flickr.com/photos/30405858@N05

Stocks are historically expensive. If you look at the data for the S&P 500 you’ll find that it trades at over twenty-times earnings and with a dividend yield of under 2 percent. This is historically expensive. On average stocks have traded at a price to earnings multiple of about fourteen in the past 100 years, and they have traded with a P/E ratio below 10. Dividend yields on stock have also been higher historically, with the average being over 4 percent, and with bottoms being made when stocks trade with dividend yields exceeding 6 percent.

What this means is that it is a mistake to go out and buy an S&P 500 index fund such as the SPDR S&P 500 ETF (NYSEARCA:SPY). However, this by no means implies that you shouldn’t own stocks. The fact is that there are several stocks out there that trade with very low valuations despite the fact that they have strong businesses. In this article I point out four options that investors should consider. All of them trade with P/E ratios of less than 10, and yet their management teams have done an excellent job of creating long-term shareholder value. With that being the case, I think these stocks can be purchased now.

1. John Deere (NYSE:DE)

John Deere trades with a price to earnings multiple of about 10. The stock is so inexpensive because the company has had a couple of weak years as agricultural commodity prices have been weak. Weak agricultural commodity prices mean that farmers have less money with which to buy tractors and other Deere products.  Therefore the company’s sales have declined somewhat and investor are reticent to assign a market multiple to the shares. But longer term agricultural commodities are in a bull market, and if you look at the company’s stock over the course of the 21st century Deere shares have risen nearly six-fold! Management has done an excellent job of growing the business and of maintaining the company’s stellar reputation in the industry. It has also been buying back stock and paying a dividend. These points make the stock a buy at the current valuation.