Cheap Stocks Are Still Out There

 | May 03, 2013 | 10:00 AM EDT  | Comments
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Though the bull market has pushed U.S. stocks up in 10 of the past 11 months, plenty of stocks are still reasonably priced. Just look at Thursday's top performers: The three best gainers in the S&P 500 -- Harman International (HAR), Seagate Technology (STX) and Prudential Financial (PRU) -- still look like buys to me.

Shares of Harman, the leading maker of car stereos, jumped 8% Thursday, taking the stock out of the loss column for the year and put it in the green. Shares in the Stamford, Conn., company have done little over the past five years, with a compound average annual total return of a bit above 3%. But I think consumers will loosen their purse strings in 2013 and 2014 for cars -- and for car stereos.

For fiscal 2013 (ending June), Harman pegged earnings at about $3 a share. Analysts had been looking for about $2.80. At 0.8x sales, I think Harman shares are still reasonably priced. The 10-year average for this stock has been 1.3x sales.

Seagate shares, meanwhile, jumped 7% Thursday -- but they are not even close to expensive, in my view. The stock sells for a little above 6x earnings and yield 3.8% in dividends. Based in Dublin, Ireland, Seagate is one of the two largest makers of disk drives in the world. The other is Western Digital (WDC), which I own for clients.

 The knock on the disk-drive makers is that they are tied to the personal-computer market, which is declining in favor of mobile devices. But many mobile applications are powered by powerful servers in "the cloud." These servers use fewer drives than PCs do, but the drives they use are more expensive. Cloud devices generate about one-fifth of Seagate's revenue, and that figure is growing.

Finally, Prudential Financial -- one of the largest U.S. life insurers -- has its headquarters in Newark, N.J. (and, to its credit, it has stuck with that troubled city instead of moving to some suburban office park). Its stock popped nearly 7% Thursday as it reported earnings that solidly trumped analysts' expectations.

For 2013, it looks as if Prudential may earn about $8 a share, above the consensus estimate of $7.95. That means the stock, even after Thursday's jump, sells for 9x earnings, and 0.8x book value (corporate net worth per share).

Insurers, particularly large ones like Prudential, are walking bond portfolios. The stocks are cheap, because if interest rates rise, the bonds these companies hold will drop in market value. If held to maturity, however, the bonds will still be worth their face amount. If rates rise, the insurers will invest new money at fatter rates.

The market as a whole isn't cheap now -- it's fairly priced. But if the stocks that led Thursday's rally are not very expensive, you can bet that there are many other reasonably priced shares out there.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston. He can be reached at jdorfman@thunderstormcapital.com.

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