U.S. equity markets have had a good year. The prices of the indices themselves sit at all-time highs while year-to-date returns have given investors reason to celebrate. The Dow Jones Industrial Average has gained 10.5%, the SP 500 better than 9% and the tech-heavy Nasdaq is up nearly 17%. However, unless you were smart enough to take the passive index-following route or stick with the much hyped FAANG (Facebook, Apple, Amazon, Netflix, Google) names, you may be among the frustrated.
In previous articles , I’ve called out some of those frustrated investors moaning about the lack of quality bargains in stocks. Again, I will say that they’re just not looking hard enough. Using a screen for large-cap stocks based on forward price-to-earnings ratio (P/E) discounts and dividend yields greater than 2%, I’ve uncovered a list of high-quality, big-name, franchise stocks that are trading at deep discounts to the market.
Here are three of the strongest.
The Blackstone Group (NYSE: BX )
With a market cap of nearly $40 billion, Blackstone is the undisputed heavyweight champ of what we in the wealth management business refer to as alternative asset management. Alternative assets run the spectrum from long-short, hedge-fund style products to real estate to hard assets and beyond. Typically, they are any investment strategy that has a low or no correlation to traditional equity and fixed income markets.
A quick dive into the company’s numbers tells the real story. Average annual revenue has grown 30% over the last five years, and earnings per share ( EPS ) have increased 37% annually over the same period. These successes have fueled Blackrock’s ability to grow its important distribution rate (it is a master limited partnership) at a yearly rate of nearly 44%.
Going forward, the firm’s growth should be propelled by a friendlier regulatory environment and tax reform, as well as large investor demand for its products due to flattish equity markets and persistently low interest rates. BX shares trade with a forward P/E of 11.4 and yield a hefty 7.2%.
Qualcomm (Nasdaq: QCOM )
When it comes to mobile communications, Qualcomm literally owns the space. The company pioneered the technological standard in commercial wireless cellular in creating the original CDMA platform and has expanded its grasp on the sector through 3G and 4G mobile technology. As Qualcomm owns patents on the technology, the company has prospered from a gigantic revenue stream of royalties while continuing to lead the way in manufacturing semiconductors and other chips for the wireless industry.
Despite a handful of high-profile legal issues, with the most recent being a $1 billion dispute with Apple (Nasdaq: AAPL ), the company has hammered out consistent five-year average annual revenue growth of 10.6% and EPS growth of 9% for the same period. This superior performance has allowed management to reward shareholders with five-year average annual dividend growth of 23%. Shares trade at a forward P/E of 12.5 and pay a 4.5% dividend yield.
Teva Pharmaceuticals (NYSE: TEVA )
Although caution should be exercised in the healthcare space right now, primarily due to looming uncertainty concerning Obamacare reform in the United States, Teva makes a more compelling investment argument than most. The company is one of the world’s largest manufacturers of generic drugs. And despite this seemingly defensive position, the theme here is classic turnaround value.
The company’s biggest troubles stem from its recent $40 billion acquisition of Allergan’s (NYSE: AGN ) generic drug business, for which many pundits contend they paid too much. Teva financed most of the purchase with debt, weakening its balance sheet. Compounding these problems, the company missed its most recent earnings and revenue forecast, lowered guidance for the rest of the year, and slashed its dividend by 75%.
Teva is still a solid bet. Lowering expectations gives the company wiggle room to surprise on the upside. Cutting the dividend will preserve cash. The company is also mulling a sale of its women’s healthcare unit. Asset sales are never a bad thing. All in all, the stock trades at just 70 cents on the dollar to its book value with a forward P/E of 3.6 and a dividend yield of 1.8%.
Risks To Consider: These stocks are definitely in the “value investing bin” for one reason or another. While Blackstone looks the cleanest, Qualcomm and Teva come with some baggage. However, the consistent operating histories of both and strong brand names have the ability to weather any short-term turbulence.
Action To Take: As a basket, these stocks trade at an average forward PE of 9.2 which is a 51% discount to the average forward P/E of the SP 500 index. The three have a combined dividend yield of 4.5%, more than twice that of the SP average. Based on the ability of all three companies to execute, a forward P/E expansion to just 12 would result in a total return of 27% or better. Patient, long-term investors could be well rewarded.
Editor’s Note: Stocks like Tesla and Netflix have been some of the most obvious winners of the last decade; churning out predictable quadruple-digit gains even while investors have been ignoring them. So which major stocks are next? Click here to read our FREE report about the market’s next big winners …