3 Stocks Priced 50% Below the Market

The broad stock market trades at 20 times this year’s earnings, judging by the S&P 500 index. Its long-term average is below 15. Next year, analysts expect earnings underlying the S&P 500 to climb 33%. If they’re right, stocks today are reasonably priced. However, if earnings plateau at their third-quarter level – if, say, companies can’t find more cost-cutting opportunities next year, and their sales still aren’t growing — then stocks today are more than 20% overpriced.

The companies below might prove worth the price in either case. They’re valued at least 50% below the S&P 500 based on their sales. Sales are often a more reliable indicator of value than earnings during times of economic stress, because they’re not as volatile. Over the past two years, sales fell 20% from their highest point to their lowest, while earnings a year ago briefly disappeared altogether. Of course, sales aren’t worth much without profits. But the companies below are more profitable than their peers. They’re not flawless, of course, but their discounts seem to more than make up for their scratches and dents, and each pays a dividend.

The world’s largest defense contractor, Lockheed Martin (LMT) is expected to bring in sales of more than $45 billion this year. Yet the whole company sells for about $29 billion. The low price is likely owed to two worries. First, like many companies with pension plans, Lockheed must make large contributions to offset last year’s market losses, Management expects to contribute $1 billion this year and $1.4 billion next year, up from $109 million contributed in 2008. But the stock market’s rebound this year might have reduced Lockheed’s pension shortfall, and in any case, more money set aside today means less that will be needed tomorrow. Second, the federal government is overspending its tax receipts by a margin that seems unsustainable, making cuts to discretionary spending, including on defense, necessary. But Lockheed brass sees sales increasing by 4% to 5% in each of the next three years. Perhaps the bosses are too bullish, but shares at 10 times earnings seem amply cheap.

Del Monte Foods (DLM) sells canned fruits and vegetables under its namesake brand and others, along with pet food under brands like Kibbles 'n Bits and 9 Lives. Its prices are generally lower than those of the competition, which has served the company well during the consumer spending pinch over the past year. Sales and margins are on the rise. But the company is a food-industry pipsqueak, with sales of less than one-third those of Dole (DOLE) and less than one-fifth those of ConAgra (CAG). Analysts say giant pet-food makers in particular, like privately held Nestle Purina, are likely to reduce prices to defend market share. For the moment, though, Del Monte is on a roll. It has topped earnings forecast by double-digit percentages in each of its past four quarters, it’s expected to increase sales by 5% in its fiscal year ending May 2010 and its shares sell for less than 12 times earnings – despite having nearly doubled over the past year.

Target (TGT) shares are up sharply this year, and although the company beat third-quarter earnings forecasts, it offered cautious guidance for the crucial fourth quarter, so the stock carries risks. But investors can take comfort in a comparatively reasonable valuation for shares of 15 times earnings. Also, sales have been rising and the company has for now halted losses in its credit-card business. Management says sales of necessary products like health care products and food remain strong, while demand for discretionary items is starting to pick up. Careful inventory and cost control over the past year has kept operating margins ahead of those of other discounters like Costco (COST) and Wal-Mart (WMT).