The S&P 500 is up 21.5% over the last year (including dividends) which has pushed a lot of stocks into what many investors would classify as expensive territory.
Yet there are still quality stocks trading below their typical valuations over the last several years.
These companies have strong growth, excellent financial health, tend to beat S&P 500 returns, and are projected to keep growing at an impressive rate.
Price/Earning or P/E is often used as a measure of how pricey a stock is. Cory Mitchell, an analyst with Trading.biz recommends, “looking at the current P/E relative to the stock’s historical P/E.
“This lets me know if a stock is cheap or expensive relative to its typical valuation. I only use P/E in this way on companies that have positive, stable, and rising earnings over time, since I don’t want to invest in a company with erratic or declining earnings.
“It’s also crucial to understand that generally the greater the growth rate of the company, the higher the potential P/E it will trade at because investors are willing to pay a higher price for strong growth.”
Mitchell has identified Alphabet, ExlServices, and WR Berkley as financially healthy companies, with long-term increasing earnings, that are still priced attractively in this rising stock market.
Alphabet Inc. (GOOGL)
The parent company of Google, Alphabet, currently has a 25 P/E. While the P/E did get as low as 15.5 in 2022, the current P/E still indicates an attractive buy point for this stock.
Not only are earnings expected to grow, which will bring down the P/E (forward P/E is 18.4) but on prior rallies the stock has had P/E values often between 30 and 36. This indicates the stock is potentially undervalued compared to how it has historically traded.
Here are some other factors that make GOOGL attractive:
- 21.5% average yearly EPS over the last five years.
- 19.3% expected yearly EPS over the next five years.
- “A” financial health rating from Morningstar.
- Outperformed the S&P 500 by 4.6 percentage points, per year, over the last decade.
ExlService Holdings (EXLS)
The current P/E of EXLS is 28.5. Over the last five years readings between 35 and 45 have been quite common. The forward P/E is 18.4 showing how increasing earnings (in this case, expected) reduce P/E.
EXLS is trading at one of the lowest P/E levels in the last five years; having ranged between 24 and 55, the current value is near the low of that range.
Here are other factors that make EXLS attractive:
- 26.4% average yearly EPS over the last five years.
- 15.5% expected yearly EPS over the next five years. The lower expected growth going forward could mean EXLS trades at a lower P/E going forward, yet the earning growth and current low valuation still make it an attractive purchase for long-term investors.
- “A” financial health rating from Morningstar.
- Outperformed the S&P 500 by 6.7 percentage points, per year, over the last decade.
WR Berkley (WRB)
The current P/E of WRB is 16. Over the last five years, P/E has ranged between 11 and 44. The current reading is near the lower end of that range. The forward P/E is 12.4.
Here are other factors that make WRB attractive:
- 17.4% average yearly EPS over the last five years.
- 9% expected yearly EPS over the next five years. The lower expected growth could mean WRB trades at a lower P/E going forward, yet the earning growth and current low valuation still make it an attractive purchase for long-term investors.
- “B” financial health rating from Morningstar.
- Outperformed the S&P 500 by 6.3 percentage points, per year, over the last decade.
Investing in quality companies
When a company’s earnings are growing steadily, it provides a safety net, especially if the stock can be purchased at a low valuation.
That doesn’t mean these stocks can’t drop. They may. All these stocks have experienced 25% or greater declines over the last few years. Going forward they will experience similar drops and rallies as they have in the past. Decide on your plan, such as setting a stop loss or target, or continuing to hold stocks for the long-term as long as they continue to possess admirable traits.
