Spotlighting the Smaller S&P 500 Stocks

 | Jul 19, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

amd

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intc

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ati

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pbi

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x

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clf

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xom

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aapl

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goog

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msft

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brk.b

Everybody knows the biggest stocks in the Standard & Poor's 500 Index. They are household names:

Exxon Mobil (XOM)

$420 billion market value

Apple (AAPL)

$406 billion

Google (GOOG)

$302 billion

Microsoft (MSFT)

$294 billion

Berkshire Hathaway (BRK/B)

$291 billion

 But what about the smaller stocks found within the S&P 500? You don't hear much about them:

Advanced Micro Devices (AMD)

$3.17 billion

Allegheny Technologies (ATI)

$2.90 billion

Pitney Bowes (PBI)

$2.85 billion

Cliffs Natural Resources (CLF)

$2.74 billion

US Steel (X)

$2.67 billion

 Here are a few observations on the stocks at the bottom of the S&P 500 ladder.

Advanced Micro Devices (AMD), a maker of semiconductor chips, is perennially playing catch-up with Intel (INTC), which dwarfs it in size. From time-to-time, AMD comes up with an innovative chip and gains market share. Those gains usually subside as Intel brings the economies of scale to bear.  After posting losses in five of the past 10 years, Advanced Micro Devices has a stock languishing below $5, compared to a peak of $47.50 in 2000. But I can't view it as a bargain -- not when it sells for 8x book value (corporate net worth per share), and has debt more than triple stockholders' equity.

Allegheny Technologies (ATI), a Pittsburgh maker of specialty metals and alloys, sold for about $81 a share at the end of 2006, but now fetches only about $27. Allegheny managed to stay profitable through the recession of 2007 to 2009, and this year will probably post its 10th straight year of positive earnings. I consider it undervalued at about 7x earnings.

Pitney Bowes (PBI), the monarch of postage meters, pays a nice dividend, as befits a mature company.  The yield is more than 5%. However, the balance sheet seems to me an utter disaster. Debt is about 36x stockholders' equity.

I'm embarrassed to say that I recommended Cliffs Natural Resources (CLF) at much higher prices. The iron ore miner (which also produces some coal) has suffered as the Chinese economy has slowed.  Cliffs lost more than $6 a share in 2012 and is expected to earn about $2.10 a share in 2013 -- way below the peak of $11.48 in 2011. The stock is now down to about half of book value and sells for about 8x estimated earnings. I believe it will reward investments made at these levels.

United States Steel (X) was the largest U.S. corporation when it was formed in 1901. In the mid-1950s, it was still among the top three companies by sales in the Fortune 500. (I remember; I used to steal my father's Fortune magazines.) Today, it is a struggling also-ran. Yet I think the stock at about $18 is likely to prove a good investment. It sells below book value (corporate net worth per share) and for only 0.1x revenue.

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