Tech stocks are too expensive. Try these 3 cheap actions instead

Hopes for a post-pandemic recovery have Wall Street in rally mode, with the S&P 500 reaching an all-time high in August. For existing investors, this has been a good time to be in the markets, but what is a newcomer or someone with new capital to invest to do?

Stocks, by historical standards, are expensive, and popular sectors like technology seem especially expensive. It’s easy to feel like you’ve missed out on the gains and be reluctant to buy at these levels. It is also not very attractive to buy distressed companies simply because their valuation is more reasonable.

But not all stocks are overvalued, and not all companies that missed the rally are struggling. There are still stocks with reasonable valuations in certain sectors of the economy that have been largely overlooked by investors.

Here’s why three Fool contributors believe Lockheed Martin (NYSE: LMT), caterpillar (NYSE: CAT), and Cummins (NYSE: CMI) are relative bargains in a market where few stocks can be considered to be actually on sale.

Image source: Getty Images.

This defense titan offers a combination of value and growth

Lou whiteman (Lockheed Martin): Imagine finding a company that has a $ 140 billion backlog of future business, generates over $ 1 billion in cash per quarter, and has a habit of returning that cash to shareholders. Now imagine if this company was trading at less than half of the average price / earnings ratio of the S&P 500. Lockheed Martin is that company.

Lockheed Martin is the world’s largest pure defense contractor responsible for the F-35 Joint Strike Fighter, Sikorsky helicopters, missiles and missile defense, and electronics. The company also includes a space company which, with annualized revenue of around $ 12 billion, has a massive scale and achieves advantages over scorching space start-ups like Virgin Galactic Holdings which trade at much higher valuations.

Even among defense contractors, Lockheed Martin is a steal. The company is trading today at 14 times earnings, a discount to General dynamics’17 times the multiple of earnings, and it is valued below Northrop Grumman in terms of multiple of sales.

Defense actions have been under pressure for the past year over fears that the 2020 US presidential election will put a brake on Pentagon spending, but one only needs to turn on a news channel to remember the world does not become more secure. And Lockheed Martin is an expert in areas such as high-speed hypersonic missiles and space technology that are poised for continued investment in research and development, even if the United States pulls out of active military operations.

Lockheed Martin, in its most recent quarter, generated $ 1.3 billion in cash from operations and, through share buybacks and dividends, was able to return 129% of free cash flow to shareholders. Investors who buy today see a dividend yield close to 3% and the potential for substantial growth in the years to come, as some of the research currently underway at Lockheed’s legendary Skunk Works facility in Southern California are converted into new contracts. Buying in Lockheed Martin today offers investors many ways to earn.

This industrial giant is making value investors purr

Rich Smith (Caterpillar): “Cheap” seems to me a subjective term – but we can always apply objective standards to it and offer a stock that is cheap –uh than average, right?

For example, it shouldn’t be too difficult to run a screen on finviz.com and find stocks that cost less than the expensive P / E ratio of 35 which is the average of stocks listed on the S&P 500. To refine your research, try looking for companies whose profits are growing faster than the 14% per annum that the S&P is also expected to increase over the next five years. Finally, to sweeten the deal, consider looking for stocks that pay more than the market average dividend yield of 1.4%.

And what do you find after doing all this?

A Caterpillar material handler in action.

Image source: Chenille.

Caterpillar – who happens to be a very likely suspect of benefiting from Congress’ next $ 1,000 billion (or is it $ 4.5 trillion?) Infrastructure plan.

You see, with its price-to-earnings ratio of just 26.3, Caterpillar costs about 25% less than the average S&P 500 stock. (It’s even cheaper when priced on free cash flow, by the way – only 20.8 times). Meanwhile, analysts polled by S&P Global Market Intelligence estimate that Caterpillar is expected to increase profits by 25% per year over the next five years as the global economy recovers and money begins to flow in the Great Reconstruction. American infrastructure. As Caterpillar is one of the country’s leading construction equipment manufacturers, that sounds like a solid growth thesis to me.

And on top of all of the above, Caterpillar shares pay a 2.1% dividend to its shareholders. Modest in absolute terms, it is nonetheless a dividend yield that is 50% more generous than the average dividend payout of 1.4% on the S&P 500 – and much better than the 0% yield you will get from the S&P 500. Most technology stocks.

An engine manufacturer for the transport of tomorrow

Rich Duprey (Cummins): Engine maker Cummins failed to keep up with the gains made by the Broad Market Index over the summer, so even though stocks are up 5% since the start of the year, its stock is lower than the 20% rise of the S&P 500.

Much of the concern surrounding Cummins has been the computer chip shortage that has plagued much of the auto industry. Although Cummins engines primarily help drive heavy trucks, not cars, they do provide Stellantis Motor vans as well as those for light commercial vehicles in several foreign markets.

The pandemic crushed Cummins’ business last year and as it begins to revive its growth engine, COVID-19 variants, supply chain delays and chip shortages continue to weigh on its performance. .

Still, second-quarter revenue jumped 59% to $ 6.1 billion as the North American market came back to life with a 75% year-over-year gain. Chairman and CEO Tom Linebarger told investors: “Strong demand in many of our key markets has resulted in continued sales growth in the second quarter, particularly in North America, and has resulted in strong profitability,” emphasizing the $ 600 million in net profit by generally accepted estimates. Cummins accounting principles (GAAP) generated during the period.

Yet far more than your regular diesel truck engines, Cummins has become a leader in hydrogen fuel cell technology, and has recently partnered with the oil giant. Chevron develop low carbon fuel cell infrastructure for vehicles and industry. They will explore how to implement hydrogen capabilities at the oil giant’s facilities, and Cummins said it is also exploring the development of an internal combustion engine powered by hydrogen.

In the same vein, Cummins is building an electrolyzer plant in Spain to produce hydrogen and is helping French rail manufacturer Alstom expand its Coradia iLint fuel cell passenger train to hydrogen in Poland.

At just 12 times earnings estimates, Cummins is trading at a fraction of what its long-term earnings growth rate is expected to and at 17 times the free cash flow it produces. The pandemic will pass, supply lines will straighten out, and the chip shortage will eventually go away, leaving Cummins on the path to greater growth.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Frances R. Smith

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