The Market Is Expensive, but These Stocks Aren't

The Market Is Expensive, but These Stocks Aren't

Take any metric you like and the market looks expensive. The S&P500's P/E ratio hovers above 19 compared to the historical average of 15.5. The Shiller P/E, which averages earnings over the past 10 years and takes inflation into account, is near 25 compared to the historical average of 16.5. It's times like this that investing in an index fund takes a few more seconds of hesitation.

What shouldn't you hesitate about in this market? Stocks that are still comparative values. Here are a few tech names worth considering.

Bruised Big Blue
Shares of the information technology giant IBM have underperformed the market by nearly 30% this year. Its P/E ratio from the past 12 months is at a level last seen in 2010. In the latest quarter, revenue declined 4% year over year, but earnings per share increased 10%.

Why is the market discounting IBM's future? One reason is that it's taken a hit in China, where revenue dropped 22%. IBM blamed it on the fact that "demand from state-owned enterprises and public sector has slowed significantly, as decision-making and procurement cycles lengthened." The Asia-Pacific region contributes 24% of total revenue.

However, while the market looks down a bit on IBM now, it has bright spots that could prove its bears wrong. The company's core is solid, and it still generated $2.2 billion in free cash flow, which it is using to bet on future technologies, as evidenced by its acquisition of cloud-computing company SoftLayer. And while these investments may take a while to pay off, it still returns plenty of value to investors through its 2% dividend yield and the remaining $5.6 billion in buyback authorization.

Behind every mobile product
While Qualcomm took a small beating in the form of a 5% share-price drop after its latest earnings report, the company's negative news wasn't nearly bad enough to doom to its future. Management warned of slower revenue growth in the current quarter. While this obviously isn't great for the short-term investor, those in it for the long term can take solace in management's honesty and clarity.

And while the current quarter may not meet previous estimates, Qualcomm sits in a very enviable niche for the foreseeable future. Besides powering mobile devices, which is the one bright spot of the computing hardware industry, Fool Subhadeep Ghose notes that "Qualcomm is also increasingly foraying into new areas of revenue generation by manufacturing chips embedded in a range of home appliances such as power switches and thermostats." With the "Internet of Things" forcing small computer chips into everything, Qualcomm may find surprising new markets.

Admittedly, the company's P/E ratio is near the market's at 18.5, but Qualcomm has greater potential and quality than the average company. The impatient investors who were merely eyeing the next quarter have sold on the recent poor guidance, but buy-and-hold investors can capture the value from Qualcomm's promising long-term prospects.

Verifying value
The investor knows that timing the market is impossible, but it might sense that things are a bit frothy. However, that doesn't mean that every stock is bid up beyond its inherent value. IBM and Qualcomm are just two such companies that I believe are worth more than the current market believes.

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Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool owns shares of IBM and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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