GameStop Corp. (GME - Analyst Report): This is the world's largest video game and entertainment software retailer with a Zacks Rank #2. The company has an earnings estimated growth rate of 11.9% for this fiscal year and ROE of 19.1%, much higher than the industry average of 7.5%. It possesses a lower P/E ratio of 12.16 compared to 15.31 for the industry.
As the economy is reviving after the first-quarter slump, the Fed is on track to raise interest rates sometime this year, with the promise of keeping them at lower levels "for quite some time after the first increase." The initial phase of increase would actually be good for the stocks, as it would reflect an expanding economy and a lower risk of deflation. This in turn would push the stock market upward.
Moreover, merger mania, higher consumer confidence, fat wallets and rising income are the biggest tailwinds for the stocks, suggesting that 2015 is the year of growth. However, stretched valuations, an aging bull market, strong dollar and lower oil price might somewhat restrict the potential upside in stocks. As per the report from CNBC, the S&P 500 index is trading at a forward P/E ratio of 16.8, down from P/E of 17.3 at the start of March.
That being said, investors should hunt for bargain stocks in the index that are worth less than what they should actually be. It means that some stocks often overreact to both positive and negative news, resulting in share price movement that does not mirror the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and offers potential for capital appreciation when the stock finally reflects its true market price.
How to Find Bargain Stocks?
While handpicking bargain stocks can be a daunting task, our Zacks stock screener makes this process simpler. First, we have selected the stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) in the S&P 500 index. This is because the top ranks suggest rising earnings estimates, which indicate the optimistic view on earnings by analysts and hence have higher chances of outperformance.
Then we looked for Value Style Score of ‘A,’ which condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside.
Our research did not end there. We again shortlisted the stocks to see some growth factor by screening this year’s estimated growth rate of at least double digits and ROE higher than the industry average. And we finally arrived at the five best bargain picks with Value Style Score of ‘A’ that have the potential to deliver higher returns with lower volatility.
5 Bargain Stock Picks
Marathon Petroleum Corporation (MPC - Analyst Report): This Zacks Rank #2 is one of the largest petroleum product refiners, marketers and transporters in the United States. The stock is trading at a P/E ratio of 9.8, reflecting a massive discount to the industry average of 14.1. The company’s earnings are expected to grow by a substantial 33.3% in the current fiscal year and ROE is higher at 28.2% versus the industry average of 13.4%.
Tesoro Corporation (TSO - Analyst Report): As one of the largest independent refiners and marketers of petroleum products in the United States, Tesoro has a strong earnings growth rate of nearly 22% for this year. Its ROE is also impressive at 14.6% compared to the industry average of 13.4%. Further, this Zacks Rank #2 stock trades at a significant discount of about 12 % to the industry average.
Lam Research Corporation (LRCX - Analyst Report): This Zacks Rank #2 is a leading supplier of wafer fabrication equipment and services to the global semiconductor industry. The company’s earnings are expected to increase 18.2% for the current fiscal year with ROE of 16.7%, which is above the industry average of 14.8%. Shares of LRCX look extremely cheap at the current levels, trading at P/E of 13.1, a massive discount to the industry average of 19.9%.
Cardinal Health Inc. (CAH - Analyst Report): This is one of the largest health care supply chains in North America, providing pharmaceuticals and medical products and services to more than 100,000 locations each day. The company, with a Zacks Rank #2, is expected to grow at an impressive earnings rate of nearly 13.3% in the current fiscal year. It has a P/E ratio of 17.4 and ROE of 22.6% versus the industry averages of 21.9 and 14.11%, respectively.In Conclusion
Given the increased confidence in the U.S. economy and a slower-than-expected Fed rate hike path, the S&P 500 will surely surge in the coming months providing some “X Factor" to these bargain stocks.
by Sweta Killa
Source: http://www.zacks.com/stock/news/182761/5-best-bargain-sampp-stocks-to-buy-now
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