3 Stocks for Bottom Fishers

On Friday I noted stocks were arguably cheap, but that they might nonetheless fall well further based on two historic measures. For two centuries stocks have yielded an average of 5%, and now pay 3.3%, leaving investors with too much to hope for in price gains and not enough to pocket in cash.

Also, for about 130 years stocks have traded at an average of 14.5 times trailing earnings, and stand now at 13.5 times trailing earnings after Monday’s dramatic selloff. But the market has also spent several multiyear stretches at single-digit price/earnings ratios. With stocks having traded at more than 20 times earnings for most of the past two bubbly decades, it seems plausible (if far from certain) that they could dip to 10 times earnings.

What might the market look like at such a valuation? It’s not hard to imagine, since some stocks are already there. Consider the following three, which sport dividend yields of more than 5% and P/E ratios at or near single digits — perhaps just the thing for investors looking for shares that might have already bottomed out.

Motors ought to be as much a part of America’s environmental push as wind and solar farms. After all, motors turn electricity into motion, so a shift to more efficient ones will reduce the need for electricity and its chief fuel source, coal. Congress accordingly mandated a shift to more efficient motors starting in 2007. Unfortunately for Baldor Electric, which sells motors and other power transmission products to manufacturers and distributors in 160 countries, short-term turmoil for manufacturers is eclipsing the long-term benefits of an efficiency push. Distributors have been clearing out motor inventories, which has clipped sales, and high prices for steel and copper last year ate into profits.

Worse, a big acquisition in 2007 has left Baldor with debt at 61% of total capitalization, just as investors have soured on big borrowers. Shares have lost two-thirds of their value since September 2008. Management is newly focused on debt reduction and plans to repay at least $125 million of its $1.3 billion of debt this year. Lower raw materials prices should help. In a pinch, the company could save about $31 million a year by halting dividend payments. If it doesn’t, investors collect a 5.4% yield. Shares go for seven times earnings.

In early 2008 Merck shares went for $60 apiece. Today they’re about $28. Yet yearly sales are about the same, and earnings per share this year are expected to shrink only 5% after increasing 7% last year. The selloff might have more to do with legal dangers than economic ones. Merck pulled its best-selling anti-inflammatory drug Vioxx off shelves in 2004 amid concerns over increased heart attack and stroke risk, and in 2007 agreed to a $4.85 billion settlement covering some 85% of patients who took the drug.

The stock stands at less than nine times earnings and yields 5.4%. Like all big drug makers, Merck faces expiring patents in coming years, but analysts expect its recently launched drugs and developmental ones to more than offset lost sales, with total revenues topping $30 billion in 2011, up from $24 billion this year.

Spun off from Altria nearly a year ago, Phillip Morris International sells cigarettes outside of the U.S., where growth, especially among emerging markets smokers, remains brisk. Sales are forecast to grow this year and next. Last year earnings per share increased more than 18%. This year a strong dollar will shave 80 cents a share from earnings, leaving $2.85 to $3.00 a share, the company estimates. So the stock at 11 times earnings doesn’t quite have a single-digit P/E, but would if not for currency effects (and might if the dollar reverses). The company is only modestly indebted, and stockholders collect a 6.1% dividend.