With the major indexes once again testing their all-time high a lot of stocks have traded into overbought territory. As fears grow of a possible recession stemming from the ongoing trade war with China, a lot of investors are worried about where to put their money to work.
With a high level of uncertainty in the market right now, you want to make sure that you are putting your money to work in stocks that are trading at a reasonable price.
It is important to realize that a stock's price is not the way to judge whether a security is trading at a reasonable price. A low price stock may actually be in overbought territory while a stock with a much higher price could be undervalued.
The best way to judge a stock's current valuation is its price-to-earnings ratio.
Stocks that trade between 15 and 20 times earnings are generally considered a good value, and the lower the P/E ratio the better. In addition to looking at a stock's P/E, you have to dig a little deeper and look at how strongly the company is expected to grow profits.
Stocks that trade with a low valuation and are forecast to enjoy strong growth are great buy candidates, especially in today's market of falling interest rates and an ongoing trade war.
American Express (AXP)
Credit card operator American Express (AXP) has trended lower over the last two months but shares remain up 25% on the year as the company continues to benefit from a strong overall economy and consumer sentiment. Not only are consumers buying they are running record high credit card balances. American Express last reported earnings mid-July with a top and bottom line beat, and the company will next report on October 18 with the consensus calling for earnings of $2.08, up from $1.88 during the same period last year. AXP is currently trading at less than 15 times earnings and profits are forecast to rise at an annual rate of 10% over the next five years. Analysts have an average price target of $131.85 and AXP is trading at $118.85.
Deere & Co. (DE)
Deere & Co. (DE) makes heavy machinery with a heavy reliance on the agriculture sector. In its trade war with the U.S., China has targeted farmers, and as a result the last year have been volatile on farming-related stocks such as Deere. Despite the volatile period, DE is currently trading just shy of its all-time high, and there remains a lot of value in the stock. As expectations rise that the U.S. and China are nearing a possible trade deal and China has agreed to buy agricultural products from the U.S. the market has pushed DE higher, but there is always the risk that negotiations will stall again and DE will sell off again in response. Risk is going to remain in DE until a trade deal is finalized, but DE's current valuation and its expected growth will keep traders interested in the stock. DE will report its next set of quarterly numbers on November 15 with the consensus calling for earnings of $2.16 per share, versus $2.30 during the same period last year. The stock is trading at just 16 times earnings, and analysts forecast profits to rise 16.3% per annum over the next five years. DE stock is trading at $165.20 with an average price target of $167.54.
Life insurance provider MetLife (MET) has appreciated 18% on the year but the stock has trended lower since a mixed quarterly report at the end of July. The company posted a positive earnings surprise, but sales fell slightly short of the consensus and traders drove the stock lower. The recent drop in the stock has created a good buying opportunity with shares currently trading at just 7.8 times earnings, which are forecast to rise 6.6% annually over the next five years. The risk in MET right now is lower interest rates. Insurance companies realize stronger earnings as rates rise since they earn significant income from interest on premiums they invest so the Federal Reserve lowering rates does pose a risk if rates continue to fall. Despite the risk, the stock looks attractive based on its current valuation. The company's next quarterly report will come October 30 and if the MetLife is able to post better than expected numbers on both the top and bottom line the stock could shoot higher based on its current valuation. MET trades at $47.26 with an average price target of $52.18.
Johnson Controls (JCI)
Johnson Controls (JCI) is a diversified technology company that makes products for heating and air systems, security systems, and fire detection and suppression systems among others. The stock has been a strong outperformer in 2019 with shares up 48% year to date and is currently trading at its 52-week high after posting better than expected earnings and sales at the end of July. Even with shares at their 52-week high the stock has a lot of value with a P/E of just 6.8. The company has struggled to grow earnings in recent years with profits down an annual rate of 1.7% over the last five years but looking ahead analysts see profits rising 34% next year, and at just under 24% per annum over the next five years. The company will report its next set of quarterly numbers October 30 with analysts expecting a profit of $1.41 per share, up slightly from $1.38 during the same period last year. The stock trades at $43.54 with an average price target of $40.75.