Best Cheap Stocks To Buy 2018 _BEST_

As monetary conditions continue to tighten in most countries, shrinking liquidity and rising bond yields likely spell trouble ahead for stocks. Where can investors take shelter? Some of the best stocks for downside protection should also be capable of delivering consistent earnings and cash flow growth over the next several years. All roads lead to health care, specifically pharmaceutical stocks.

best cheap stocks to buy 2018

The best of the cyclical stocks, those well-positioned competitively, are likely candidates for outperformance as markets anticipate the re-start of economic growth. A disciplined strategy of buying world-class cyclical companies during the downturn may prove very rewarding when markets begin to price in recovery.

Value stocks have underperformed growth for much of this post-2008 period, resulting in historically wide gaps between value indexes and growth indexes. From the year 2000, cheap stocks in the MSCI All Country World Index have outperformed expensive stocks by more than 40 percent over the next 12 months when the earnings yield spread (earnings yield of cheap stocks minus earnings yield of expensive stocks) has been in the top decile. At the end of March the earnings yield spread was in the 92nd percentile. At some point, extreme levels of depressed valuations will inspire buyers to snap up bargains.

The massive growth in liquidity created by global central banks after the financial crisis has stalled in 2018, and will likely shrink in 2019. Meanwhile, valuation spreads between expensive and cheap stocks, measured by relative price-to-earnings ratios, are at extremely wide levels vs. history. In the past 20 years, these especially wide valuation spreads typically led to a narrowing of the gap and subsequent outperformance of cheap stocks.

After being written off as dead, value stocks have staged a comeback. The rally is part payback following years of underperformance and partly a reaction to the best growth in decades. However, today the more speculative parts of value are stalling. For example, recently small-cap value has struggled relative to large-cap. Part of the headwind for small caps is that they are inherently more volatile. While investors are looking for cyclical exposure, they are turning more cautious on pure market risk.

The MSCI Emerging Market Index is trading at 13.5 times trailing earnings and 11.3 times forward earnings. The former represents a 26 percent discount to developed markets. Based on price-to-book (P/B), emerging-market stocks look even cheaper. Currently, the stocks are trading at a 30 percent discount, the largest since the summer of 2016.

To be clear, there are risks. An economic slowdown or a more abrupt tightening of U.S. monetary conditions, particularly in the context of a stronger dollar, would probably cause emerging market stocks to lag. However, to the extent that the global expansion continues, emerging markets is the rarest of things in a prolonged bull market: a cheap asset class.

First, value is cheap. While value stocks are by definition cheaper than growth, today they are much, much cheaper. Since 1995 the average ratio between the Russell 1000 Value and Russell 1000 Growth Indices (based on price-to-book) has been 0.45; i.e., value typically trades at a 55 percent discount to growth. Currently the ratio is 0.30. Value has not been this cheap relative to growth since early 2000.

In addition to being cheap, for the first time this year value may once again have a catalyst. It normally outperforms when economic expectations are improving. In contrast, when economic growth is modest, investors are more likely to put a premium on companies that can generate organic earning growth, regardless of the economic climate. This dynamic helps explain the strong year-to-date rally in technology and other growth stocks.

This creates an opportunity for value. In an environment in which investors are more sanguine about economic growth, they are more likely to notice that value stocks are not only cheap but also offer better leverage to any economic acceleration. Value is not dead yet.

Another equity strategy is to buy U.S.-exposed stocks in markets that have sold off aggressively for other reasons. A basket of U.S-exposed euro-zone stocks will likely perform well, and with Italian equities stressed due to domestic politics, companies such as Fiat-Chrysler Automotives N.V. and Luxottica Group SpA, which both have over 50 percent of their sales in the U.S., could provide a cheap route to buying U.S. earnings.

Annaly Capital Management has spent a good part of the start of 2022 trading under the $8 per share level. This means that the commercial space retailer is one of the best dividend stocks under $10 and can currently be bought at price levels that return a predicted annual dividend yield of 11.083%. 041b061a72