Cheap stocks are harder to find — with the S&P 500 up 24% this year. But top-rated S&P 500 stocks with low valuations are still out there. In fact, Warren Buffett already owns two.

Nine stocks in the S&P 500, including top Buffett holdings Synchrony Financial (SYF) and United Airlines (UAL) as well as industrial United Rentals (URI) and biotech Biogen (BIIB), are cheap relative to the market and carry high IBD Composite Ratings. The stocks are predominantly in the financial and industrial sectors.

All of these stocks trade for 10.5 times or less their adjusted diluted earnings per share the past 12 months and carry IBD Composite Ratings of 85 or higher, according to an Investor’s Business Daily analysis of data from MarketSmith and S&P Global Market Intelligence.

That’s a rare combination.

S&P 500: Searching For Value

Value stocks are pulling ahead of growth as investors seek safety if corporate earnings sputter. Finding stocks with low valuations, though, is tougher than it was. Following the rally this year, S&P 500 stocks now trade for a median of 21 times earnings.

Only 40 stocks in the S&P 500 carry price-earnings ratios of less than 10.5.

Why? The market costs more than it did. The S&P 500 trades for 20.3 times historically adjusted earnings the past 12 months, says S&P Dow Jones Indices. That’s 8% higher than the index’s average valuation, measured this way, of 18.8 since 1988.

But chasing stocks just because they’re cheap isn’t a winning stock strategy. Prudent investors know it’s best to own leading stocks, not necessarily the cheapest ones. It’s better to buy high and sell higher than get stuck owning a bargain-priced dud.

And that’s why it’s also important to also find S&P 500 stocks carrying a high Composite Rating. A Composite Rating of 85 or higher is a sign the stocks are outpacing 85% of all stocks when it comes to the most important stock-picking criteria.

United Rentals: Cheap S&P 500 Stock With A Perfect 99

Cheap stocks don’t have to be laggards. Take United Rentals, which rents out industrial equipment like backhoes and boom lifts.

The stock trades for just 10.3 times the $14.46 a share it earned over the past 12 months. That’s quite a discount even to Deere (DE), which is valued at nearly 17 times its trailing earnings.

And United Rentals is no laggard either. Shares are up 44.9% just this year. That blows away the 26.1% gain by the Industrial Select Sector SPDR ETF (XLI) this year.

And United Rental’s earnings per share is seen jumping nearly 19% this year. No wonder it wins IBD’s perfect 99 Composite Rating, which factors in both stock-price strength and earnings growth. And next year? Analysts forecast earnings to jump another 5%.

Synchrony Financial And United: Buffett’s Cheap Stocks

Remember the days of single-digit price-earnings ratios? They’re still here with many financials.

In fact, five of the nine top-rated stocks with low valuations are in the financial sector.

Take credit card issuer Synchrony Financial. The shares trade at a price-earnings ratio of just 6.7. And that’s following a blistering 56% gain this year. Just for context: The Financial Select Sector SPDR ETF (XLF) is up 25% in 2019 so far.

That no doubt catches the eye of famed investor Warren Buffett. Buffett owns, through his Berkshire Hathaway (BRKB), 3% of Synchrony’s shares outstanding. That stake, worth $772 million, makes Berkshire the sixth largest owner of the stock.

Synchrony also has the fundamentals to back up its stock price gains. The company’s earnings are expected to jump nearly 14% this year. All told, Synchrony sports a 93 Composite Rating.

In addition to Synchrony, Buffett also owns a giant 8.7% stakes in United Airlines. His position, worth $2 billion, makes Berkshire the airline’s second-largest owner.

This impressive bull market is pushing the S&P 500 higher. But don’t assume all stocks are overvalued.

Buffett doesn’t.

Author: Matt Krantz

Source: Investors: 9 Top Stocks Are Still Dirt Cheap — Including Two Warren Buffett Owns

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