Stocks are cheap now, despite the S&P 500 eclipsing its former peak, Oakmark Fund Manager Bill Nygren told CNBC on Wednesday. Those might be reassuring words for long-term investors who are seeing stock prices go quickly higher as they try to switch out of bonds and into stocks. Considering that Nygren consistently cranks out excellent 5-year returns for his investors, he probably knows a thing or two about spotting market froth.
Nygren says today’s share valuations are not high relative to their own history or other asset classes, and he’s unimpressed by the international crises some investors worry will weigh on share prices. (He doubts anyone will remember much about Cypress banks in five years.) Instead, he points to several tech shares that sport low valuations, share buyback plans and modest dividends.
Nygren particularly likes Apple (AAPL), Intel (INTC) and Microsoft (MSFT). Each of their forward price-to-earnings ratios hovers around 10, which are long-time lows. They each have large share buyback programs underway and regularly rising dividends. Dividend yields are at respectable levels.
Nygren also liked Texas Instruments (TXN), although its forward price-to-earnings ratio at about 20 is almost twice any of the others. The company is buying back shares, however, and its dividend yield is 3.1%.
Nygren allows as how his tech favorites have downside risk as consumers switch to mobile computing and away from PCs. But he contends that the low PE ratio, plus dividends and share repurchases backed by these companies’ large cash piles, make the risks worthwhile.
Nygren believes a lot of investors traditionally in fixed income products are mistakenly chasing “safe” stocks that offer big dividends now, such as some health care and consumer stocks. He didn’t name names, but those might include Campbell Soup (CPB) or Kimberly-Clark (KMB), which have seen their share prices and PE ratios soar this year.
The S&P 500 is on track to record its best quarter ever, having run up some 7% so far this year. It’s a situation one might expect to spark some cautionary advice from market gurus. But few pundits are sounding alarms about valuations now. Most, like Nygren, say it will take a bigger crisis than Cypress to make them back off of stocks now.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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