With a strong start to the current earnings season the major indexes are once again testing new record highs. Corporate earnings growth has slowed, but companies, for the most part, have delivered quarterly results that fell in-line or topped analyst estimates.
If the earnings season continues to deliver upbeat numbers the major indexes will continue to move higher and soon will be once again testing new all-time highs. As investors we love to see the broader market trading at record levels, but it also creates a sense of fear among some investors that “what goes up must come down”.
While it is certainly true that a record high market will result in some overvalued stocks, there are still a lot of stocks that have participated in the market rally that remain reasonably priced. In some cases we see stocks that remain undervalued and those are the stocks we want to focus on as we consider where to put our money to work in this bull market.
Let’s start with tech giant Apple (AAPL). The company is fresh off a better than expected Q2 report and shares are up (at the time of writing) 7% today. The company delivered positive surprises on both the top and bottom line and announced an additional $75 billion stock buyback program. iPhone sales are falling, which in the past would have sent the stock sharply lower, but Apple has touted its growing services division the last few quarters, which saw revenue jump 16% year over year and is now the company’s second biggest revenue driver. With today’s jump the stock’s valuation has risen, but it remains a great value with a forward P/E of 16.8 and earnings expected to rise at an annual rate of 13% over the next five years. AAPL is trading at $213.90 with an average price target of $207.58 but expect to see analysts start to ratchet their targets higher following the strong Q2 numbers.
Soft drink maker PepsiCo (PEP) is coming off a strong better than expected quarterly report in mid-April that helped drive the stock to a new all-time high. The company beat estimates on both the top and bottom line and delivered modest year over year earnings growth of 1%. The stock trades just pennies below its all-time high but is still priced at just 14 times earnings with profits forecast to rise by 5% per annum over the next five years which should keep strength under the stock moving forward. The stock is also a dividend aristocrat with a 2.9% yield and a 46-year streak of dividend increases.
American Express (AXP)
Payment processors continue to be among the top-performing stocks in the market, and American Express (AXP) recently hit a new all-time high following a better than expected quarterly report in April. American Express has grown earnings by 7.4% annually over the last five years and is expected to continue to grow profits at 9.1% per annum over the next five years. The stock hit a new all-time high today but there still appears to be a lot of value in the stock which is currently trading at just 15 times earnings and 13 times future earnings. Analysts see additional upside in the stock with an average price target of $120.58 versus its current $117.63. Given the stock’s recent strength and the expected growth estimate you can expect to see analysts move their targets higher to allow for shares to build on their recent gains given the company’s recent positive earnings surprise.
Lockheed Martin (LMT)
Aerospace and defense contractor Lockheed Martin (LMT) is trading in the upper end of its 52-week range following a much better than expected quarterly report in the latter part of April. The company posted big positive surprises on both the top and bottom line and drove shares higher. LMT is currently trading at just 13 times future earnings and analysts see profits rising 12.4% per annum over the next five years. With so much geopolitical uncertainty in the world, defense contractors should continue to benefit from military buildups and updates. LMT is currently trading at $334.63 and analysts see decent upside potential with an average price target of $361.42.