Undervalued gems remain available for savvy investors

It’s still a bull market in the United States

Although most investors are still wary of stocks, the bull market is going strong, at least in the United States. The Dow Jones Industrial Average is up nine per cent and the S&P 500 is up 12 per cent (including dividends) in just 3½ months.

Investors of all types — whether individual or institutional — are skeptical of the depth of these increases. It is, of course, a good sign since stock prices — in the short term — reflect the perception of investors.

So when the perception is low, stock prices will be low relative to intrinsic values. But the undervaluation of stocks is not evenly distributed. For instance, investors are more enthusiastic about high-dividend stocks. These kinds of stocks have done better lately, so obviously, investors are more eager to buy them.

I was looking at U.S. companies that are stable and paying high dividends like Kraft, Procter & Gamble and CocaCola. These are outstanding enterprises, but their P/E ratios are 19 times this year’s earnings estimates. Although, I believe these levels are totally warranted, they are at a premium to the S&P 500 average P/E (which is between 14 and 15 times). If you’d like to acquire more undervalued securities, you should look elsewhere.

I would start with financial services stocks. Many of them are still depressed and unloved.

JP Morgan is still unappreciated even though the reasons for the sharp drop of last year are no longer present. The stock trades at nine times this year’s earnings estimates. Its dividend is a bit low ($1.20), but it represents less than a quarter of the bank’s profits. This is bound to go up in the next few years.

Wells-Fargo is also cheap: Its stock trades at nine times adjusted earnings for 2013. As with JPM, Wells-Fargo pays a low dividend distribution rate.

Another undervalued financial enterprise is Goldman Sachs. At $149, its stock is trading at a slight premium to book value. Once the economy is doing better and the mergers and acquisitions market begins to improve, they should earn more than $20 per share and the stock could trade at $240 within a few years.

Technology stocks represent another segment of the market that looks undervalued. This industry is a little tricky because of its unpredictability. It’s hard to tell where Intel, Apple or Microsoft will be in five or 10 years. But their stocks look very cheap: with each of these companies trading at 10 times earnings or less. Even Qualcomm — which has strong fundamentals — looks undervalued. Their integrated circuits are at the forefront of communication devices like smartphones. Earnings have doubled in the last five years and should go up another 20 per cent in 2013. Even with this impressive performance (and a superb balance sheet), the stock trades at 15 times this year’s estimates. Finally, Cisco Systems is as solid as ever and its stock is trading at only 12 times earnings (and yields 2.6 per cent).

A third segment of the market that is doing well and still looks underappreciated is the health-care industry. Although many biotech and

I would start with financial services stocks. Many of them are still depressed and

unloved.

pharmaceutical stocks have done very well lately (like Gilead Sciences and Biogen Idec), there are some health related stocks that remain interesting.

Stryker, an orthopedic implants manufacturer, is an outstanding medical devices company. Sales were up 7.5 per cent in its latest quarter and earnings per share (EPS) were up 12 per cent. At $64, the stock trades at only 13 times once you exclude the $7 per share in cash on the company’s balance sheet.

Another great company is Varian Medical. Varian designs, manufactures and services medical devices and software for treating cancer with radiotherapy, radiosurgery, proton therapy and brachytherapy worldwide. EPS have grown at 15 per cent annually over the last five years. The stock also looks undervalued with an adjusted P/E of only 16 times.

Finally, there is the Canadian company Valeant Pharmaceuticals. The company has been growing very fast thanks to a brilliant CEO and an aggressive acquisition strategy. With the recent purchase of Medicis, Valeant is now the leading dermatology pharmaceutical company. Valeant should earn in 2013 twice what it was earning in 2011. And the stock trades at around 13 times this year’s earnings estimates.