Stocks Are the Cheapest They’ve Been in 3 Years. Here’s Where To Find the Best Deals, According to Experts

It’s been a rocky few months for the stock market. That may mean a buying opportunity.

Near record highs in October, the market plunged into near bear market territory at the end of 2018. While they’ve snapped back somewhat, stocks remain almost 8% below their 2018 highs. The upshot is that the market now looks the cheapest its been in years.

As of early February, stocks in the Standard & Poor’s 500 index traded at prices that were, on average, equal to about 18 times the profits those companies had earned in the previous 12 months, according to data compiled by Bloomberg. That’s lower than at any point since February 2016. Indeed, the S&P 500 is at its cheapest levels relative to forward earnings for even longer – since 2013.

Of course, there’s a catch. While stocks have gotten less expensive that’s because investors are increasingly worried about obstacles like the U.S. trade war with China and slowing earnings growth.

Money spoke with several veteran investors to see whether stocks are a good buy right now.

Lewis Altfest

Chief Executive of Altfest Personal Wealth Management

While stocks were expensive before the 2017 Tax Cuts and Jobs Act, now the market looks more fairly priced, Altfest says. The tax cuts allowed U.S. companies to increase their profit margins in 2018. For 2019, however, the effect of lower taxes is already baked in. With companies also facing rising labor costs, profit margins may have peaked.

One option, says Altfest, is to look abroad. Emerging markets – particularly in Asia – should rebound from a weak 2018. "China's earnings have been not so great over past 10 years," he says, suggesting there's plenty of room to grow. The Federal Reserve's recent decision to ease off on interest rate hikes could also help: Since China pegs its currency to the dollar, U.S. rate hikes can reverberate through the Chinese economy, pushing up borrowing costs for Chinese companies.

Altfest argues that while there is certainly some value in the U.S. market, it's spread out so investors have to look closely to find it. His advice: seek companies with strong fundamentals in segments of the market that remain attractively priced, such as industrials or materials companies.

Scott Black

Founder of Delphi Management

“The market is more reasonably priced" than it was through much of 2018, says Black. Still stocks could face further, steep declines if the trade war with China drags on, disrupting U.S. companies' supply chains and crimping profits.

Black says mutual fund investors should look at small- and mid-cap stock index funds. Value stocks have lagged over the past decade, as investors became more and more enamored with superstar companies like big tech names. As a result overlooked value stocks are comparatively cheap. For example, price-to-earnings for the iShares S&P 500 Growth ETF is at 25.5, compared to just 15.7 for the iShares S&P 500 Value ETF.

When it comes to individual stocks, Black says look for attractively priced names with high returns on equity and strong balance sheets, which are the most likely to weather a downturn. Another plus: Companies that do most of their business domestically, at least until the U.S.-China trade dispute is resolved.

John Linehan

Chief Investment Officer of Equity at T. Rowe Price

When stock prices are measured against companies' forward earnings -- that is, what analysts expect them to earn for 2019, as opposed to last year -- the market looks still cheaper, with stocks trading at about 16 times' forecast profits, according to Linehan. Still he adds, that's more or less in-line with historical averages, not below. “I don’t think we’re cheap, but we’re on the cheaper side of the ‘reasonably valued’ bucket," he says.

Linehan describes trade policy as "the big wild card," since tariff disputes could disrupt companies' supply-chains further, prompting another big sell-off. If that happens it could be a buying opportunity, however. "Take advantage of market dislocations," he says.

Charlie Bobrinskoy

Vice-Chairman, Head of Investment Group at Ariel Investments

“U.S. equities are a wonderful asset class to have, but it wouldn’t surprise me if volatility is higher than last year,” according to Bobrinskoy. With a decade since the last U.S. recession, investors are getting increasingly nervous, he says. But, he adds, signs don’t yet point to a downturn in 2019, especially with job growth and record-low unemployment boosting consumer spending and, by extension, corporate earnings.

His advice for investors: Avoid pricey tech stocks and look instead for companies with a “sustainable competitive advantage" like an established brand, low-cost manufacturing, or unique assets. Some examples include alternative asset managers KKR and Blackstone, media companies Viacom and CBS, or healthcare service firm LabCorp.

"In general, don't try to time the market – instead, think long term," Bobrinskoy advises. “As long as you invest in good companies with strong financials and wide moats, then you should be fine in the long run."

Thyra Zerhusen

Chief Executive at Fairpointe Capital

“Valuations overall look much better than they did six months ago,” according to Zerhusen -- although still not cheap. They "can go lower...I expect them to,” she says.

She recommends “averaging down,” buying a little bit, and if the market goes lower, buying more. “Look for stocks whose prices are lower than they should be." She prefers dividend payers with strong cash flow and balance sheets, such as the New York Times Co. or Hormel Foods Corp. Another good bet: Mid-caps, like data and analytics firm Teradata Corp. or lighting manufacturer Cree Inc., since these stocks are often overlooked by financial consultants and in general are easier to understand from a business perspective.

An earlier version of this story misstated Scott Black's name on second reference.