To The Moon

These Are the 10 Cheapest Stocks in the S&P 500 Right Now

Meet the U.S. stock market's bottom of the barrel: two car makers and one of their suppliers; two oil drillers; a reinsurer; a drugstore; a television broadcaster; an airline; and a company named in part for off-patent Viagra. They trade at four to eight times projected earnings, the lowest multiples in the S&P 500, at a time when the overall index has ballooned to 25 times earnings, a level that has some market strategists predicting dim returns from here.

"The investment landscape today looks eerily similar to 1999," wrote Ben Inker, co-head of asset allocation at GMO, an asset manager, in a recent report. That year was around the peak of the dot-com stock bubble, and GMO calculated at the time that a 60/40 portfolio of stocks and bonds was priced to return only 2% after inflation over the following decade, versus 8% the prior decade. Stocks soon crashed.

Today, David Kostin, chief U.S. equity strategist at Goldman Sachs, predicts an S&P 500 return of just 1% a year after inflation over the next decade. That is based in part on the CAPE, or cyclically adjusted price-to-earnings ratio, which adjusts for the tendency of earnings to inflate near market peaks and shrink during downturns. Today's CAPE is higher than it was just before the crash of 1929, and only slightly lower than before the 2000 crash.

There are still plenty of bulls, of course, like Joe Quinlan, head of CIO Market Strategy at Merrill and Bank of America Private Bank, who is upbeat about the economy and artificial intelligence. "Just look at the AI, the automation, the capital that we're spending," he says. "The ruthlessness and restlessness of corporate America is going to continue that great upward track record."

Worried investors can look to cheaper stocks, with two caveats. First, it isn't just a handful of AI giants that have made the U.S. stock market expensive. The S&P 500 minus the so-called Magnificent Seven still looks pricey. Second, investors looking for value stocks can do much better than simply buying the 10 cheapest stocks in the S&P 500 based on P/E ratios listed below. For example, $Invesco(IVZ)$   has a pair of funds called S&P 500 Pure Value, which is designed to track stocks with deep value characteristics, and FTSE RAFI US 1000, which weights companies by measures of economic output rather than market size, creating a value tilt.

GMO uses a portfolio strategy that it calls Benchmark-Free Allocation. It currently calls for a heavy weighting in overseas stocks. "The U.S. is trading at or near its largest premium ever relative to the rest of the world," writes the firm's Inker. It also uses a strategy of buying the cheapest 20% of the U.S. stock market and selling short, or betting against, the most expensive 20%, based on an "extreme dislocation" in the relative prices of the two.

So consider the following list merely an illustration of what's cheap and why. These companies aren't about to fix their problems soon, but that isn't what's needed for value stocks to pay off. As Inker writes, "Cheap companies as a group don't grow as fast as the average company, but some of them wind up positively surprising investors." An investor who bought the cheapest 10 S&P 500 stocks in equal amounts a year ago would have made 52% including dividends since then, beating what has been a stunning 41% return for the index -- but that doesn't mean anything for future returns. Note that the best-performing stock from that bunch -- $United Continental(UAL)$  , up 112% -- is still on today's list, and still challenged. Here are the current 10:

Viatris, 4.4 times earnings, remains the S&P 500's cheapest stock. The company, created in 2020 through combining a $Pfizer(PFE)$   spinoff with EpiPen seller Mylan, makes Viagra, Lipitor, Celebrex, and other former blockbusters. There's plenty of free cash flow -- more than $2.3 billion a year, management predicts. What's missing is growth. The plan is to spend half the cash on dividends and stock buybacks and put the rest toward in-house drug development and other ventures. Wall Street's best $Guess?(GES)$   is that revenue will continue slipping this year and next before stabilizing in 2026.

General Motors, 5.3 times earnings, and Ford, 5.9 times, are struggling to get the timing and investment spending right on the shift to electric vehicles. The good news is that GM shares jumped 10% on Tuesday after the company topped Wall Street forecasts and raised its guidance on what it called consumer strength. Ford reports next week. So does $BorgWarner(BWA)$  , which makes drivetrain components for electric and traditional vehicles, and just makes this list, at 8.3 times earnings.

$Walgreens Boots Alliance (WBA.US)$ is in earnings free-fall. Like many drugstore chains, it's being squeezed on drug reimbursement by industry middlemen called pharmacy-benefit managers, while sales of general merchandise migrate to the likes of $Amazon.com(AMZN)$ and $Walmart (WMT.US)$. $CVS Health (CVS.US)$, which is also struggling despite owning a large PBM and health insurer, has been closing stores. $Rite Aid (RADCQ.US)$ recently slashed its debt in a bankruptcy restructuring and operates as a private company.

$Everest Group (EG.US)$ sells insurance to insurers and is solidly profitable and growing. The stock has underperformed on anxiety over global warming, and the company recently adding to loss reserves. Recent valuation: 6.5 times earnings. 

Paramount Global combines a fading legacy TV business with a subscale streaming operation and a storied but struggling movie studio. The company is the subject of a takeover deal which critics say is more lucrative for its controlling shareholder than for its ordinary investors. A special committee appointed by the board says it shopped around.

Crude oil prices are down about 19% over the past year on falling demand forecasts, especially in China, where the economy is weak and the shift to electric vehicles has been rapid. That has Wall Street trimming earnings forecasts for drillers, sending share prices lower, and landing two of them on this list: $Apache (APA.US)$ owner APA at 6.5 times earnings and $Devon Energy (DVN.US)$ at 8.2 times.

Finally, there's United Airlines, at 7.3 times earnings, despite the big run-up. JP Morgan, the biggest bull on the Street there, points to cheap carriers like $Southwest Airlines (LUV.US)$ adding fees and upcharges. "For over a decade, we believe Southwest and others structurally over-earned at United's expense," its analyst wrote earlier this month. "United is in the early innings of reversing this phenomenon."

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