Forget Tesla. There are US stocks that are actually cheap

Ajay Vaid from the research firm Square Mile said: “Although some investors are questioning if they should reduce exposure to the US, it remains home to some of the world’s leading innovators and companies. This position is unlikely to be eroded.”

Andrew Wellington from Lyrical Asset Management said that while fast-growing stocks were vulnerable to high inflation because it erodes the value of the profits they hope to generate in the future, rising prices have historically been good for cheap shares.

The biotech firm Moderna, which produced one of the vaccines for the coronavirus pandemic, is trading on what looks like an extremely cheap price-to-earnings ratio (a key barometer of a company’s value) of just 6 times.

Formerly a growth darling, Moderna swung from being loss-making in 2019 to become highly profitable last year because of the sales of its Covid vaccine. It should continue to rake in the revenues for the foreseeable future, but they are likely to fade over time. Shares are down 65 per cent since early August, but remain eight times higher than they were five years ago.

James Budden from the Edinburgh fund house Baillie Gifford still thinks Moderna will deliver returns for shareholders over the long-term because it is leading the way in messenger RNA technology that can be used to tackle lots of different diseases.

Wellington said that the healthcare provider Cigna looked interesting, trading on a PE ratio of 15 times and offering a dividend yield of 1.8 per cent. He said that the firm was able to deliver healthcare at a lower cost than its peers.

Lithia Motors is America’s fourth- largest seller of new and used vehicles. It trades at 8.7 times earnings, but Wellington said that it was one of the fastest-growing firms in the US.

Dan Brocklebank from Orbis Investments likes Comcast, the cable and broadband company. The firm trades at a PE of 15 times, so is slightly more expensive, and its dividend yield is 2.2 per cent. Brocklebank sees a big opportunity to provide better broadband across the country, with 60 per cent of US neighbourhoods being offered slow internet service by its competitors. He thinks earnings can grow at more than 10 per cent a year.

Malcolm MacColl, the manager of the Monks Investment Trust, called the health insurer Anthem a “stealth growth stock” that can do well for investors over a long time. MacColl said the firm, which has a PE ratio of 18 times, was “underappreciated as a growth company”. “[Anthem] can make investors huge returns over time, if they are patient.”

Felix Wintle, the manager of the VT Tyndall North American fund, suggested that consumer staples firms looked good value. He argued that the sector makes up 6 per cent of the S&P 500, its lowest weighting in the index since 2000, while profit margins will probably increase as they pass on price rises to customers.

Wintle likes Procter & Gamble, which owns brands such as Head & Shoulders and Pampers; and Coca-Cola, the soft drinks maker. Both are on PE ratios of about 26 times.

Within the smaller companies universe, Build-A-Bear, which sells stuffed bears and other cuddly animals, trades at 6 times earnings, is doing well post- pandemic, said Richard de Lisle, the manager of the VT De Lisle America fund.

Other small-cap choices are Bunge, a seed distributor that will benefit from rising commodity prices, and Builders FirstSource, a builders’ merchant that is growing as fast as its rival Home Depot.

Backing Warren Buffett could be a prudent move, according to Eric Lynch, co-manager of the iMPG US Value fund. Berkshire Hathaway’s share price is just shy of its all-time high, but Lynch argued that it is much cheaper than it was two decades ago if you look at the price-to-book ratio, which compares the share price with the value of a company’s assets minus its debts.

Value funds

The value style of investing, where stockpickers try to find companies that are cheap compared with the assets that they own, has gone out of fashion, but some value investors remain.

Vaid likes the Dodge & Cox US Stock fund, which is managed by a committee of investors who work to identify companies with strong franchises trading at an attractive valuation. The financial services companies Wells Fargo and Charles Schwab are the biggest holdings.

Vaid also likes the Natixis Loomis Sayles US Equity Leaders fund, which looks for high-quality firms where the share price is below the manager’s calculation of their value. Top holdings are the micro chipmaker Nvidia and Amazon.

How to find cheap shares

The definition of a cheap stock varies, but there are a few key ratios to assess.

The price-to-earnings ratio tells you where a company’s share price is relative to how much it earns each year. Work it out by dividing the share price with the earnings per share, which can be found on a company’s balance sheet. Look for a ratio of about 16 times or lower, although true value investors generally prefer a ratio below 10 times.

The price-to-book ratio is another to consider. This compares the share price with the “book value” — the value of a company’s total assets minus its total liabilities. The book value is the theoretical amount that shareholders would get if the company’s assets were sold and all of its debts were paid. If you can buy a company on a price-to-book below 1 times, you are buying it for cheaper than the value of the business.

Wellington said that expensive stocks rarely did better than cheap shares. The only real instances when they did was in 2018 to 2020 and the tech bubble, when shares in internet companies boomed between 1998 and 1999. “For most of history, the norm has been higher returns for lower PEs and lower returns for higher PEs,” Wellington said.