Companies with solid businesses and strong growth prospects, such as Google parent Alphabet, have been unfairly swept along with the market selloff.
David Paul Morris/Bloomberg
When the stock market gets pounded, bargains abound—or so it seems. But in a bear market, the key to investing success is separating the thoughtlessly discarded from the overpriced junk.
With about two-thirds of the stocks in the
down more than 20% from their all-time highs and the index itself down 15%, many stocks are on sale. Investors have their pick of nearly every sector, from tech and communication services to consumer staples and discretionary.
But the stock market isn’t like a clothing store, where bargains are happily scooped up, even if not all of them will look as good when you get home. Instead, when stocks are falling, many investors find it difficult to pull the trigger, fearful they’ll pick a dud that only adds to the pain that’s already afflicting their portfolios. But there are opportunities amid the rubble.
“The chaos has created a handful of buying opportunities,” says Andy Kapyrin, co-chief investment officer at RegentAtlantic, a New Jersey–based wealth management firm. “It’s worth wading into the chaos.”
Bear markets always seem to expose stocks with lofty valuations, bad accounting, and weak earnings, among other issues. And it’s never enough just to scan the market for stocks trading at the low end of their valuation ranges—a stock’s price/earnings ratio alone isn’t a sign that it’s truly cheap.
“The first step is to ask if the stock is as cheap as it looks,” says Chris Senyek, chief investment strategist at Wolfe Research. The second “is to look at the durability of the earnings.”
It isn’t easy. Jim Rocchio, co-founder of Kailash Concepts Research (KCR), says his team analyzes factors like return on equity and the differences between reported, actual, and cash profits, as well as other metrics. The point is to find high-quality companies that trade at reasonable valuations.
Here are six stocks that fit the bill.
(ticker: GOOGL) has dropped some 26% in 2022, 11 percentage points more than the S&P 500’s 15% decline. But that drop has done wonders for the stock’s valuation, which has fallen to 18.6 times 12-month forward earnings, down from more than 25 times at the start of the year. Yet little has changed for Alphabet, and the future still looks bright. Sales and earnings are expected to grow 15% and 19% in 2023 compared with 2022, respectively. Google is still dominant in internet search and ad sales, and it’s still a cash-flow machine. Alphabet generated $67 billion in free cash flow in 2021, and is expected to produce about $339 billion between 2023 and 2025. As they say, follow the money.
You’d think the current chip shortage would be good for
(LRCX), which manufactures the equipment that produces semiconductor chips. Instead, Lam’s stock has tumbled 29% this year, as it has suffered through supply constraints of its own, not to mention higher costs. Still, Lam stock trades at just 14 times its 12-month forward earnings. That’s a discount to its own five-year average of 14.8 times and S&P 500’s 17.4 times. Despite the discount, sales and earnings are expected to grow 7% and 10%, respectively, in calendar year 2023, and free cash flow should hit $5.1 billion. What’s more, Senyek’s work at Wolfe Research and KCR’s analysis both show that its accounting is solid. Investors are getting what they pay for.
There are lots of things to dislike about Facebook parent
(FB), whose stock has slumped 43% this year. The social-media company’s sales fell well short of Wall Street expectations due to changes at
(AAPL) and competition from TikTok. Meta will be spending a ton of cash to build the metaverse and live up to its name. Meta’s sales are expected to grow by about 16% in 2023, and it should generate about $31 billion in free cash flow. Meta stock now trades at just 15.7 times its 12-month forward earnings, a discount to the S&P 500. “Facebook at a discount to the market?” says RegentAtlantic’s Kapyrin. “That’s a value stock by most people’s definition.”
(MU), which manufactures memory chips for electronic devices, is almost always cheap. But after dropping 24% in 2022, the stock is really cheap. Micron trades at just 6.2 times earnings, below its five-year average of 8.9 times. That’s a reflection of Micron’s (and memory chips’) cyclical nature, though now the business looks like it’s hitting an upcycle, with sales and earnings expected to grow by 16% and 24%, respectively, in calendar 2023. What’s more, the company is a very consistent generator of free cash flow—it had $3.4 billion in 2021, and is expected to generate another $8.8 billion and $10.6 billion in the calendar years of 2023 and 2024, respectively.
(NFLX) Covid-19 bubble has popped—and the stock has deflated in a rush. Shares are down 68% in 2022, about half of what they were at the beginning of the pandemic, in March 2020. Video-streaming competition has grown and taken a bite out Netflix’s subscriber growth; the company recently experienced its first subscriber decline since 2011. Now, though, Netflix looks like it could be a value-investing situation. The stock trades for 17.9 times its 12-month forward earnings, below its five-year average of 67.7 times and slightly more than the S&P 500. That’s inexpensive “for a company with higher profit margins, a brighter future, and less debt” than the average stock, says RegentAtlantic’s Kapyrin.
(TER), which makes test equipment for the semiconductor industry as well as robots for industrial automation, are down about 36% year to date, with more than half of that plunge coming in one day after the company gave disappointing sales guidance. The guidance, however, wasn’t due to a lack of demand, but to a delay in technology development. Teradyne still expects to make about $8 a share in 2024, and the stock right now is trading at 20 times 12-month forward earnings. What’s more, adjusted earnings estimates and estimates based on generally accepted accounting principles, or GAAP, are small. Teradyne has some of the cleanest financials in the S&P 500, according to KCR.
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