As any bull market hangs on, it gets harder to find bargains. So if you’re looking to put money to work, it’s a good time to be cautious: You want stocks that have a decent shot at moving higher in the near term but that can also avoid a severe drop when the market inevitably suffers a correction (decline of 10% to 20%) or worse. And, of course, you want to invest in businesses that are financially sound and have healthy long-term prospects.
We picked six big companies that we believe are reasonably priced relative to their profits. Five carry price-earnings ratios (based on estimated year-ahead profits) that are at or below the P/E of Standard & Poor’s 500-stock index, currently 17. Just as important, all six are leaders in their industries, and all are strongly committed to returning capital to shareholders by paying dividends, buying back shares or both.
6 Great Stock Picks for an Aging Bull Market
Wells Fargo
Market value: $280.3 billion
Revenue: $84.3 billion
Earnings per share: $4.17
P/E ratio: 13
Yield: 2.6%
Revenue: $84.3 billion
Earnings per share: $4.17
P/E ratio: 13
Yield: 2.6%
It may sound counterintuitive, but a big part of the appeal of Wells Fargo (WFC, $54) now lies in expectations that the Federal Reserve will begin raising short-term interest rates soon. Rising rates typically help banks because they’re quicker to boost interest rates on the loans they make than on what they pay depositors. And Wells has historically gotten away with paying below-average rates on its massive base of deposits, which now exceeds $1 trillion, says Morningstar analyst Jim Sinegal. Wells’s depositors just tend to stay put. Their money has helped Wells become the largest U.S. mortgage lender, as well as the biggest bank by stock market value, worth $280 billion.
If the Fed starts to raise rates because the economy keeps improving, and if that improvement results in higher loan demand, so much the better for Wells, which has a long history of putting capital to work more profitably than most other big banks. A key risk, however, is that higher regulatory costs in the post-financial-crisis era will crimp Wells’s earnings power more than anticipated. As it is, Wall Street isn’t expecting much growth this year; analysts on average peg 2015 earnings at $4.17 per share, up slightly from the $4.10 per share that Wells reported in 2014. But profit is expected to reach $4.55 per share in 2016. And with the blessing of regulators, big banks have been freed to return more money to shareholders. Wells was expected to announce a 7% dividend hike shortly after we went to press, and there’s more to come.
Oracle
Market value: $188.4 billion
Revenue: $38.8 billion
Earnings per share: $2.88
P/E ratio: 15
Yield: 1.4%
Revenue: $38.8 billion
Earnings per share: $2.88
P/E ratio: 15
Yield: 1.4%
Many investors look to the technology sector for excitement. But value-oriented fund managers see mature tech companies, such as software giant Oracle (ORCL, $43), more as portfolio bedrock: solid businesses that are growing slowly but can still generate huge amounts of cash that can be funneled to investors.
Oracle is the dominant supplier of complex database programs and other software that is critical for major corporations. Sales were a record $38.3 billion in the fiscal year that ended in May 2014. But the total was up just 3% from the previous year. Oracle’s business of licensing software to users at a hefty up-front cost is being challenged by so-called cloud computing, which delivers software over the Internet on a pay-as-you-go basis.
Oracle isn’t blind to the threat, and is offering its own cloud-based software solutions. In the meantime, it benefits from the wide product line it has built up over the years. That means many clients find it expensive and risky to dump Oracle, and that helps keep them aboard while the company adapts to cloud computing. Surprisingly, sales in the quarter that ended February 28 rose 6% from the year-earlier period, excluding the depressant effect of currency shifts.
Oracle was confident enough to boost its dividend 25% in March. That, and stock buybacks, have enticed the value-oriented investors at the Yacktman and FPA funds, both of which count Oracle as a top holding. With the stock at a reasonable 15 times estimated year-ahead earnings, Wells Fargo Securities expects the share price to keep “grinding higher.”
