Want Cheap Stocks? Take a Look at the S&P 100

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Includes: ABT, AXP, OEF, XOM
by: Kendall J. Anderson, CFA
Jason Zweig, author of “The Intelligent Investor” column for The Wall Street Journal, penned “Stocks Are Cheaper, but They Aren’t Cheap” for this weekend’s edition. As always, Mr. Zweig provided us with another well written and timely column. This week’s column concerns the recent decline in the level of stock indices. His question: After the market’s sickening fall, how can you weigh whether investors have been frightened enough to make stocks cheap?” This question was answered by Robert Arnott of Research Affiliates and William Bernstein of Efficient Frontier Advisors.
Mr. Arnott’s answer: In the grand scheme of things, this is a blip. He adds, it is a mistake to “think that a 5% one-day change in price or a 14% dip from the highs can create bargains."
Mr. Bernstein’s answer: Stocks are “fairly valued."
Mr. Zweig himself made the case that stocks are not cheap, at least by historical price/earnings ratios. He does so by using measures preferred by the greatest investor of all time, Benjamin Graham, and revived by Robert Shiller of Yale University as the Shiller P/E, in which the E (or earnings) is smoothed over a 10 year period of time. Using this measure, the current P/E ratio is 20.2. The historical average over the past 50 years is 19.5 and the low in March of 2009 was 13.3.
Of course, using these measurements they are probably correct - especially if all you care about is “the market." Looking at the market averages is like looking down on the city from 20,000 feet. You can see the entire city but it does nothing to help you decide whether you would enjoy living there. To decide if you would enjoy living in the city you would have to get your head out of the clouds and walk the streets.
Here are some facts about an investment city designed by Standard & Poor’s, whose residents are 100 major, blue chip companies belonging to a broad range of industries. This city’s name is the Standard & Poor’s 100:
Current P/E (Trailing Earnings – Avg.)
Current P/E (12 mo Fiscal Yr Est. – Avg.)
5-yr Avg. P/E
Current P/E Relative to S&P 500
Current Div. Yield
Current Payout Ratio
5-yr Avg. Payout Ratio
14.67
13.84
17.36
89.95
2.31%
31%
34%
Click to enlarge
Data obtained from Zack’s Research Wizard on August 7, 2011
Thanks to Mr. Zweig we know that the S&P 500’s current adjusted P/E is 19.5 times trailing earnings. We also know that the adjusted P/E in March of 09 was 13.3 times trailing earnings. Walking the streets I’ve learned a few other facts. Of our 100 companies, 52 are currently priced at less than 13.3 times trailing earnings. Here are a few more facts about these bargains:
Current P/E (Trailing Earnings – Avg.)
Current P/E (12 mo Fiscal Yr Est. – Avg.)
5-yr Avg. P/E
Current P/E Relative to S&P 500
Current Div. Yield
Current Payout Ratio
5-yr Avg. Payout Ratio
10.39
9.96
14.56
63.63
2.58%
27%
33%
Click to enlarge
Data obtained from Zack’s Research Wizard on August 7, 2011
For those of you who have been sitting in cash or wanting to add to your portfolio due to the recent market decline, placing a few dollars into the S&P 100 at these levels can be accomplished easily through purchasing the iShares S&P 100 ETF (NYSEARCA:OEF). For those of you who, as Benjamin Graham described, are enterprising investors, then surely you can find a few issues from the bargain list that would meet your needs.

The 52 stocks with a P/E of less than 13.3 times earnings include representation in nine of the 10 major economic sectors of the economy. From oil and materials to high yielding utility companies, from pharmaceuticals to retailers, from technology to financials and industrials, and a couple not so easy to classify are available to build a complete portfolio or increase diversification. I personally own 11 of these 52 companies and would consider owning more.

A few of my favorites based on the August 8th 2011 closing price:

    • Exxon Mobile Corp (NYSE:XOM) at 9.22 times trailing earnings with a 2.55% dividend yield
    • Abbott Labs (NYSE:ABT) at 10.97 times trailing earnings with a 3.94% dividend yield
    • American Express (NYSE:AXP) at 11.09 times trailing earnings with a 1.54% dividend yield
I am a big fan of Jason Zweig. He has been instrumental in encouraging individual investors to use their common sense to guide their investment decisions. It is this common sense that allows him to give this final piece of advice - ”If you are a long-term investor, now is probably an opportune time to rebalance your portfolio, trimming back your bonds a bit and adding the difference to your stocks."
I just love buying quality at a cheap price. You should too.
Disclosure: Any opinion and/or information contained in this commentary are derived from sources believed to be reliable, but Kendall J. Anderson, CFA or Anderson Griggs Portfolio Management cannot make representation as to its accuracy or completeness. This commentary does not specifically address individual investment objectives and any conclusions may not be suitable for you. As in all common stock investing you can incur a profit or loss of capital. Past performance should not be taken as an indication or guarantee of future performance.
Disclosure: I am long XOM, ABT, AXP.