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These 8 portfolio stocks look pretty cheap, but only a few are worth buying

ByAdmin December 27, 2024

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The holiday shopping season has come and gone. When it comes to stock-picking, at least, the temptation to find a bargain is as strong as ever. A recent analysis of our portfolio showed that we have several cheap stocks, including one of our new additions in Bristol Myers Squibb. Still, we are in no rush to put them all in the shopping cart. Not all good deals are created equal. What we found Our analysis, known as a “screen” in Wall Street parlance, began with all 35 stocks in the portfolio. The goal was to narrow the list down to stocks that met certain valuation criteria and then apply a layer of fundamental analysis to determine the value sentiment we offered. These are the three characteristics we check: 1. Their current forward price-to-earnings ratio, based on 2025 earnings estimates, is below the average price/earnings over the past five years. 2. Their current forward P/E is lower than the combined S & P 500, meaning they are cheaper on an absolute basis. 3. They’re also cheaper than the S & P 500 on a growth-adjusted basis. To calculate this, we divided the P/E by the three-year annualized earnings growth rate estimate based on FactSet earnings consensus estimates. This gives us a metric known as the PEG ratio. We did this for every stock in the portfolio and the S&P 500. Note: FactSet has not yet compiled an earnings estimate for the S&P 500 for 2027. So, to generate a three-year compound annual growth rate, we assumed 7.3% year-over-year return growth for the S&P 500 in 2027. We used 7.3% because it is the average. Annual growth between 2012 and 2023, the last full year of earnings we currently have. We found eight stocks in the portfolio that met the above criteria: Bristol Myers Squibb, Coterra Energy, DuPont, GE Healthcare, Constellation Brands, Alphabet, Nextracker and Stanley Black & Decker. Let’s take a look at them below and see where they stack up in each metric. To simply look at these numbers and conclude that all eight stocks were immediately bought is a very quantitative and arguably misguided way to think about things. Sometimes cheap stocks are cheap for a reason that will limit their upside potential, which is known as a “value trap.” So we then took a more qualitative approach to refining the list, sorting out those that are not only cheap, but also, in our view, have strong fundamental reasons to own in the new year. Where We Stand Here’s a closer look at our thoughts on all eight stocks. Bristol Myers Squibb: As our second newest addition to our portfolio (Goldman Sachs being the newest), we clearly like the name going into 2025. Although Bristol Myers has a huge patent cliff ahead of it, we think Wall Street is underestimating the upside. the potential of management’s moves to replenish its drug pipeline, notably its $14 billion acquisition of neurology company Karuna, a treatment last year. The lead asset from Karuna was recently approved by the FDA and is marketed under the name Cobenfy. It is an antipsychotic drug used in the treatment of schizophrenia. Cobenfy prescriptions will play a key role in fund management in the coming year and we expect to see upward revisions to sales estimates. Coterra Energy: We discussed whether to add to this stock prior to our December Monthly Meeting, but declined to do so. Key to the fund is US exports of liquefied natural gas, which boosts demand for the commodity and therefore supports prices. Unfortunately, the Biden administration’s pause on new LNG permits has had a negative impact this year, and it’s too early to know what President-elect Donald Trump’s policy changes will mean for commodity prices. Nevertheless, we continue to invest in Coterra as it benefits from growing data center energy demand. We also want to keep an energy stock in the portfolio as a hedge. The idea is that higher energy prices will affect other sectors of the market, but will benefit producers like Koterra. DuPont: With the split into three separate companies expected to be completed by the end of 2025, DuPont is definitely a stock to watch. The stock is currently trading at a discount, but we argue that the sum of DuPont’s parts is worth more than the combined company. Therefore, patient investors should be rewarded as the formal separation of its water and electronics businesses approaches. Our $100 price target per share derived from our sum-of-the-parts analysis reflects current levels of around $77. GE Healthcare: As good as the company’s medical imaging solutions are, we can’t be too bullish on the stock because of its exposure to China. Until China either turns around or becomes too small to matter for profit, we cannot justify putting new money to work at GE Healthcare. Of course, the flip side is that if China starts to turn the corner, the current share price decline could make it a curly summer. But until then, we’re likely looking at something of a value trap. Constellation Brands: The possibility of high tariffs on Mexican imports is another risk during a Trump presidency. However, the weakness we’ve seen in the peso is acting as an offset, and Constellation’s massive brewery under construction in Mexico will be paid off by the end of next year – and from there, we could see a shift in cash flow that benefits shareholders. dividend increases and share buybacks. Yes, we’ve seen younger consumers move away from spirits in recent years, but beer remains a growth area in this category. Ditching its struggling wine and spirits portfolio represents another potential catalyst on the horizon. Alphabet: For most of the past year, sentiment has improved regarding the ugly duckling of The Magnificent Seven. Reasons for the turnaround include the sustainability of Google Search, a strong push in YouTube and Google Cloud, and the potential rise of Waymo, which has proven to be a leader in the autonomous vehicle space. Put it all together, and Alphabet enters 2025 on a solid note, especially given that its stock is still attractive in terms of earnings, despite a 14% advance in December. However, it is not our style to pursue such actions. We maintain our Equivalent rating of 2 on the name as we await more clarity on the company’s AI monetization strategy. Nextracker: This is another tough one we discussed before the Monthly Gathering because of how cheap it looks; our screen results highlight this. Again, the main issue to add to the stock is obscurity. While Nextracker markets an American-made product, and Trump is no enemy of solar power, he is not its biggest supporter either. Rather, Trump indicated that his view when it comes to energy is “drill baby, drill.” So for now, it will be difficult for Nextracker to sustain a sustained move higher, especially given how big its earnings could be. In other words, with Trump back in the White House, we struggle to see a catalyst that makes this worthy of new money. Stanley Black & Decker: While we feel the stock is too low to sell right now – and we’re paying a 4% dividend at current levels – as CEO Don Allan himself told us recently, we don’t want to buy it. During an appearance on “Mad Money,” he doesn’t expect much growth in 2025. Add in the Federal Reserve’s renewed thinking that interest rates need to stay higher for longer, and even if our screen looks attractive based on Wall Street’s estimates of earnings growth, it’s hard to be too optimistic about it. Our current rating of 3 means we want to wait for strength before selling. The bottom line is that Bristol Myers Squibb, DuPont, and Constellation Brands are three market stocks for members to take a close look at as they enter 2025. Alphabet will be the fourth name to watch out for, especially if the stock consolidates around current levels. The stock’s valuation is attractive, but momentum chasing is not our style, and we prefer to sell on big moves like we’ve seen at the end of the year. Indeed, we booked some profits in Alphabet earlier this month. Just because we don’t recommend buying these other stocks right now doesn’t mean we should ignore them entirely. They’re still worth keeping an eye on because they’re already cheap, meaning they have the potential to get any positive updates. While we’ve also eliminated some stocks that look attractive on a valuation basis due to fundamental concerns like higher rates, investors should note that stocks that are “expensive” by our criteria may still offer strong potential. for above. In other words, the 27 names in the portfolio that didn’t make it past all three stages of the screen have their reasons for holding. In some cases, a stock may look expensive based on earnings estimates for the next 12 months, but may perform better in subsequent years. In other cases, this is what happens to stocks of top-of-the-line companies in a bull market – they trade at high prices. Costco is a great example of this, as are other stocks on our top holdings list. None of these 12 stocks made it through this screen, but the reason they didn’t make it through is the same reason they’re core holdings: They’re the best at what they do, and when you want the best, you usually have to pay. That’s not to say that all stocks had a phenomenal year in 2024 — looking at you Danaher and Linde — but it’s to say that they’re the best in their field because they offer top-notch products and are driven by them. world-class management teams. Therefore, keeping up with our daily interpretation is more important than such a screen that only displays a snapshot. Not all cheap stocks are worth buying, and not all expensive ones are worth ditching. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investment Club with Jim Cramer, you’ll receive trade alerts before Jim trades. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY. NO FIDUCIARY ENTITY OR DUTIES ARE OR WILL BE CREATED BY YOUR ACCEPTANCE OF INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO RESULTS OR PROFITS ARE GUARANTEED.

The logo of the pharmaceutical company Bristol-Myers Squibb (BMS) is seen on the facade of the company’s Munich headquarters on August 29, 2024 in Munich, Bavaria.

Matthias Balk | Picture Alliance | Getty Images

The holiday shopping season has come and gone. When it comes to stock-picking, at least, the temptation to find a bargain is as strong as ever.

A recent analysis of our portfolio showed that we hold several cheap stocks, including one of our newer additions. Bristol Myers Squibb. Still, we are in no rush to put them all in the shopping cart. Not all good deals are created equal.