Boring Is Back
Let's look at a couple of low price-to-earnings, high yield -- and humdrum -- stocks amid oversold times.
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Despite continuing worries over ever-evolving tariffs, May greatly rewarded investors: The Nasdaq sprinted ahead by 9.6% and the S&P 500 rose 6.2%, its best May performance-wise since 1990. The S&P 500 is now trading at approximately 23-times forward earnings with a miniscule dividend yield. My view is that equities are firmly in overbought territory after their big move up in May.
Here I will outline my plan to deal with this condition and name a couple stocks I'm playing.
But first, here's why I would be cautious. Year-over-year earnings growth from the S&P 500 is projected to slow from the pace of the first quarter in the quarters ahead. Tariffs will help the prospects of a few names in the market like domestic steel producer Nucor Corporation NUE. But for most industries, tariffs will negatively impact profit margins. This will become more apparent as second-quarter earnings results hit the wires, starting in the first half of July. I expect a lot of conservative forward guidance from management along with their Q2 numbers. Earnings projections by analyst firms seem likely to be taken down across a wide swath of industries.
Obviously, some of this will depend on what kind of trade deals can be hammered out in the months ahead, but tariffs are likely to be an earnings headwind for the near term. Given the paltry yields provided by the overall market, part of my portfolio is allocated to relatively boring names, with low price-to-earnings and generous dividend yields. These are stocks that are not going to spike in trading but probably have little downside at current trading levels. I enhance these yields and garner some additional downside protection by holding these names via covered-call positions. Energizer Holdings ENR, is an example of this sort of position, which I highlighted this weekend.
Two Stocks and a Plan
Drug giant Pfizer PFE is another low price-to-earnings/high yield play that I own via covered-call holdings. The company’s heady days during the pandemic are long gone as Covid vaccine sales have fallen dramatically. Pfizer did use the lucre from that bonanza to make multiple acquisitions. That said, earnings and revenue growth over the next two fiscal years are projected to be nil or even slightly negative. But that is fully priced into the shares with the stock trading at just under eight times earnings and with an over 7% dividend yield.
Plains GP Holdings, L.P. PAGP has slowly been grinding up in the three years it has been in my tax-deferred portfolio. The rise has almost been glacier like, but that has been offset by both its over 8% yield and the option premiums I have collected with my covered-call positions around it. This midstream operator owns and maintains pipelines, storage facilities, and terminals across crude-rich regions all over North America. It is primarily focused on the transportation of crude oil and natural gas liquids or NGLs.
The company’s fee-based business model shields it from the fluctuations in energy prices. An acquisition early this year bolstered the company’s footprint in the Eagle Ford basin. Management has done a commendable job over the years integrating this type of strategic bolt on acquisition. The company has a solid balance sheet and even with the recent purchase, Plains should throw off $1.1 billion in free cash flow in fiscal 2025. Quarterly payouts have more than doubled over the past five years.
At the time of publication, Jensen was long ENR, PAGP, PFE.
