Most of the stuff that's on sale this time of year isn't worth the plastic it's wrapped in. Yet almost everyone winds up dropping hundreds or even thousands of dollars on "holiday bargains" that provide a quick thrill and then are just as quickly forgotten.
A better use for your hard-earned money involves a different kind of bargain hunting from what the crowd is doing. This year, why not seek deals on domestic stock exchanges instead? The discounts are just as good, and you'll get more than just a thrill.
I've got three high-quality U.S. stocks in mind. Two offer top-notchyields and two have attractive growth prospects. They're all available for at least -25% off (I'll explain exactly what that means shortly).
One of the companies is Abbott Labs (ABT), the well-known pharmaceutical giant. StreetAuthority has been touting this stock as undervalued for months, but the market still hasn't caught on. The stock remains a huge bargain -- particularly when you compare its price-to-book (P/B) ratio of 3.4 with what it should be based is historic P/B ratio of 4.6.
If you multiply the historic ratio by Abbott's per-share book value of $13.85, you get a share price of $63.71 (4.6 x $13.85 = $63.71). That's what the stock should be trading at based solely on the value of its assets, let alone its 3.7% dividend yield. Yet it's only trading around $47 a share -- a -26% discount.
The cheap price means Abbott's stock has that much more room to run -- and run it should. Analysts are forecasting average yearly earnings growth of +10.8% for the next five years, nearly twice the growth rate predicted for the pharmaceutical industry as a whole. That growth is expected to propel Abbott's stock into the $95 to $115 per share range -- about a +105% to +145% gain -- in four or five years.
Not surprisingly, the company's diverse line of cardiovascular, HIV/AIDS and other drugs is expected to generate most future earnings. But its diagnostics and nutritional businesses should also have a large impact, together producing an estimated 30% of forecasted sales.
Two more cheap stocks
Besides Abbott Labs, I suggest having a look at utilities firm FirstEnergy (FE) and Martin Marietta Materials (MLM), which produces aggregates like sand, gravel and crushed stone for the construction industry.
Based on a $28.60-per-share book value and a historic P/B ratio of 2, FirstEnergy ought to be trading at $57.20 a share. But it's only trading near $35 a share, which is a -38% discount. Martin Marietta's historic P/B ratio of 3.9 and book value of $31.08 a share place the value of its stock at $121.21. Yet it's trading just over $88 a share for a -28% discount.
Of course, FirstEnergy has more going for it than a cheap stock price, like a 6.2% yield, for example. The company has also rebounded impressively from serious setbacks in 2002 and 2003, when power failures led to blackouts in the Northeast and operational problems forced the temporary closure of its Davis-Besse nuclear plant in Ohio.
Now, as Northeastern utilities are being deregulated, the company is prospering and primed to continue paying high dividends, mainly because of its relatively large size (an $11 billion market cap) and low-cost nuclear and coal-fired power plants in Ohio, Pennsylvania and New Jersey. Remember, though, FirstEnergy is a utility. Like most utilities, its stock isn't likely to outperform over the long-term.
Martin Marietta, on the other hand, yields only 1.9% but offers attractive growth potential. Its stock price could gain +70%, maybe more, in the next four years on rising aggregates demand, as federal stimulus money starts flowing into highway and other infrastructure projects in key markets in the Southeast and Southwest.4,5
Population growth should boost aggregates demand in those areas, too, as older people migrate in and further stimulate infrastructure spending and new construction. Oligopolistic conditions in key markets will also be an immense advantage.
Don't look for any large near-term gains in Martin Marietta's stock, though -- aggregates demand hasn't picked up enough from recession lows yet.
Action to Take --> The best places to look for bargains right now aren't stores, but stock exchanges, especially domestic ones. Cheap U.S. stocks like Abbott Labs, FirstEnergy and Martin Marietta are buys you'll likely remember for years to come.
-- Tim Begany
Tim Begany has worked at several financial planning and investment advisory firms. He also holds a Series 65 investment consultant license. Read more...
This article originally appeared on StreetAuthority