Monday's column looked at some of the highflying stocks and sectors that have led the market higher over the last year. Some sectors, such as biotech, 3D printing and alternative energy, look as though they are in or approaching "bubble" territory. Investors should proceed with caution with these stocks or book some profits.
Today we will look at some stocks and sectors that are still reasonably priced, given their growth prospects, even after last year's better than 30% rally.
I continue to like the insurance sector. Stocks in the sector should benefit from higher interest rates, which should bolster the returns in these companies' investment portfolios. My favorite play in the sector is still American International Group (AIG), for reasons I have articulated recently.
On Monday, I bought some shares of a different insurer, MetLife (MET). The stock is cheap at just over book value and also provides a decent dividend yield of 2.1%. Better yet, it sells at just over 9x forward earnings, a deep discount to the overall market multiple.
MetLife has a growing business in the emerging markets, which currently have negative sentiment around them, but this should provide MetLife with solid growth opportunities over the long term. The feds should give the go-ahead for a stock buyback later this year. In addition, the company should succeed in its quest to avoid being labeled as a significantly important financial institution (SIFI) -- doing so would enable it to avoid an extra layer of regulation and capital controls.
The storage provider EMC (EMC), after being "dead money" for most of 2013, is finally starting to move upward. The company is the leader is external disk storage systems, and it continues to take market share from IBM (IBM), which is in a restructuring mode.
A good portion of EMC's value is its 80% ownership stake in the fast-growing server virtualization software market leader VMware (VMW). This software company continues to see annual revenue growth in the mid-teens. EMC's stake accounts for about 60% of its overall market capitalization.
EMC has a solid balance sheet that includes over $3 billion in net cash on the books, it pays a 1.5% dividend, and it is increasing earnings at 10% a year. The stock goes for 14x forward earnings, a slight discount to the overall market multiple.
Going out on the risk level a bit, United Rentals (URI) offers value as a play on construction activity continuing to pick up. The company easily beat estimates when it last reported quarterly earnings in late January. United should post revenue growth in the 8% to 10% range annually over the next two years. Earnings are projected to post 20% gains in each of those years as well.
The stock has done well in 2014 on the back of its earnings beat, an acquisition that was applauded by the Street and a rash of analyst upgrades. The shares are still reasonably priced at 15x forward earnings, and I will look to pick up shares on the next pullback in the overall market.
Momentum names led the way for much of the market rally in 2013, but 2014 started on more cautious footing. The selections above provide good value in an increasingly turbulent market.
