The stock market has been on a strong rally, rising over 20% since its low in early October. However, with prices soaring to expensive levels, finding promising stocks has become quite challenging. But don’t worry; there are still a few sectors that offer affordable options.
The market surge has been driven by expectations of economic and corporate earnings growth stabilizing in the near future. The Federal Reserve has also signaled a pause in interest rate hikes, which has helped lower the rate of inflation.
Now, the S&P 500’s forward price/earnings multiple stands at nearly 19 times, a significant increase from just below 16 times at the start of the rally. This is particularly high when compared to the attractive 5% yields on some government debt.
It’s not just the expensive Big Tech stocks that are a concern. Even the median stock on the S&P 500, which considers the higher-priced Big Tech companies, is currently valued at about 17 times earnings. This is above the 20-year average of around 16 times earnings, according to Credit Suisse.
Thankfully, several sectors still offer stocks at discounted prices compared to the overall market. While these stocks may have some potential downside, their prices already reflect a considerable amount of risk, and the upside potential seems promising. The sectors that appear especially cheap are regional banking, materials, and pharmaceuticals.
Let’s start with regional banks. The SPDR S&P Regional Banking ETF (ticker: KRE), which includes holdings like M&T Bank and Truist Financial, has experienced a decline of about 38% from its peak earlier this year. Depositor withdrawals in search of higher-yielding money-market funds have put pressure on regional banks’ ability to lend and generate earnings. However, the ETF now trades at just over eight times earnings, more than 10 points below the S&P 500’s multiple. If upcoming earnings reports show stability in deposits, an improved outlook for loan demand, and better consumer and business credit, both individual banks and the sector as a whole could recover.
There are also some attractively priced material stocks. Although the entire group is cheaper relative to the S&P 500 than in the past, certain names are more than seven multiple points below the broader index. These companies operate in materials other than metals and chemicals. For instance, International Paper, a $10.7 billion market-value company involved in industrial packaging and printing paper, trades at just over 12 times earnings. Similarly, WestRock, a $7 billion fiber-based paper maker, trades at 11 times earnings. If market confidence in consumer demand grows, it will likely boost these companies’ earnings and drive their stock prices higher.
Lastly, the pharmaceutical sector offers opportunities. The group currently trades at a multiple about five points lower than the market, compared to just one point lower historically. Bristol Myers Squibb, a drugmaker, trades at around eight times earnings. Although its myeloma treatment, Revlimid, faces patent expiration and declining market share, the company’s development of new drugs could revive its stock performance.
In a market where bargains are scarce, these stocks might be the closest things to steals.