The coronavirus pandemic has disrupted many businesses over the past year. And if you are looking at stocks that trade at low earnings multiples based on last year’s performance, you could be overlooking potential bargains. That’s because a business that is coming off a rough 2020 may have an inflated price-to-earnings (P/E) ratio, and look like a bad buy…
One way to get around this is to focus on forward P/E multiples that take into account analyst projections for the coming year. And three stocks that look cheap relative to their future earnings are CVS Health (NYSE:CVS), Citigroup (NYSE:C), and Rogers Communications (NYSE:RCI).
1. CVS Health
CVS’ stock is trading at a forward P/E multiple of less than 10 and could be an underrated buy. The typical stock in the Health Care Select Sector SPDR Fund trades at more than 27 times its earnings.
In 2020, CVS reported $5.47 in diluted earnings per share (EPS) from continuing operations, which was a modest 7.7% higher than the previous year. However, for the current year, it projects that number could come in as high as $6.22, which would amount to an increase of 13.7%. Sales of $268.7 million last year grew at a rate of 4.6%, which the company credits to strength in its healthcare benefits and retail and long-term care segments — revenue from its pharmacy division dropped by 1.9% in 2020.
The company could be due for a good year, as people can now receive COVID-19 vaccines at CVS pharmacy locations in 29 states. Not only can that help lead to more foot traffic for its stores, it also helps reinforce CVS’ position as a trusted neighborhood pharmacy. That’s the type of rapport it needs with its customers to drive growth and have any hope of competing with an online giant like Amazon, which officially launched its pharmacy business in November 2020.
CVS is delivering in-store services that Amazon can’t compete with, and that added value can give customers added motivation to shop there. The company has already been expanding its store capabilities as it looks to convert 1,500 of its locations into HealthHubs that help patients with chronic conditions. Its MinuteClinics can also treat many common illnesses. CVS will no doubt keep a close eye on how Amazon fares rolling out its new service, Amazon Care, to employees nationwide.
In the past 12 months, shares of CVS are up 32% while the S&P 500 has risen more than 70%. However, CVS also pays a dividend that yields 2.7% — well above the 1.5% payout that investors can typically expect from the average stock in the S&P 500 index. This is a cheap and underrated stock that value-oriented investors should consider adding to their portfolios today.
Another cheap stock to consider is Citigroup. It trades at a modest 10.6 times its future earnings, which compares favorably against both JPMorgan Chase and Bank of America, which trade at multiples around 14 and 15, respectively. Over the past year, all three have risen more than 70% in value as investors are showing more optimism for the economy.
When Citigroup released its fourth-quarter earnings on Jan. 15, its sales of $16.5 billion were just short of analyst expectations of $16.7 billion, but it beat on earnings (EPS of $2.08 compared to $1.34). The bank released $1.5 billion in reserves for credit loss during the period, in a move that signals confidence things will get better for the economy. In the previous period, the bank built up its reserves by $436 million.
The bank has renewed optimism for…
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