When is the best time to buy a new winter coat?
It’s certainly not late fall. That’s the worst time to buy it. Everybody wants a new coat right on time for winter. The best time to shop is at the end of winter, just before stores clear out the winter inventory to bring in the spring stuff. Stores usually have sales to clear out as much inventory as possible before it’s removed.
Market returns have been spectacular. Consider the S&P 500 returns over the past three calendar years: 2023 (26.29%), 2024 (25.02%), and 2025 (17.88%). In fact, the S&P 500 index value has more than doubled since the bull market began in October of 2022.
You haven’t had to be that picky about price to do well. You could have purchased many of the better stocks near the 52-week highs and still have gotten good returns. The bigger key to success was being in the market rather than haggling over prices. But that might not last.
Stocks are selling at some of the highest valuations in the history of the market.
When the market inevitably normalizes, the price you pay could be the difference between a good return and no return at all, even a negative return. The main valuation gauge is the price/earnings ratio, which measures stock prices against earnings. Estimates range from 26 times earnings to 32 times, which compares to the long-term historical average of 16 times.
But even the low estimate reflects the highest valuation ever, except for the dotcom bust in 2000 and temporary aberrations during the financial crisis and the pandemic, when earnings suddenly crashed. Stocks are priced at the highest valuations in history in terms of price/book and price/sales.
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That said, valuations are not as bad as those numbers indicate. As I’ve mentioned in past exquisitely crafted articles, the index construction is much different now than it has been historically. Technology is a much bigger part of the S&P 500 weight than ever before, currently over 35%. The high growth rate in that sector does justify higher prices. In the last quarter, technology sector earnings averaged over 45% growth.
It’s also true that market valuation on a forward PE basis (that factors in estimated earnings growth over the next year) is far lower, near 20 times by several estimates. The massive artificial intelligence catalyst is propelling the index to a much higher level of growth.
But no matter how you slice it, valuations are still very much near the high end historically. And those high valuations have always had a comeuppance eventually. Sure, the overall market can run higher for a while longer. But cheaper stocks will insulate you somewhat from the current game of musical chairs.
Looking ahead, beyond the stellar earnings season and the end of the Iran war, investors might sober up a bit. Getting a cheap price on a good stock tends to have less downside in a tough market. We can’t count on the bull market raging indefinitely. In more normal times, a cheap entry price can be the difference between a negative return and a decent return, or a good return and a great return.
Despite the recent strong market, there are great stocks that have performed very well historically that are selling much closer to the 52-week low than the high. The stocks should have less downside from here if the market gets funky and more upside as investors get pickier in a flatter market over the rest of the year.
2 Bargain Stocks Trading at a 52-Week Discount
Oracle Corporation (ORCL)
This stock certainly qualified as beaten up. It’s down 40% from the 52-week high. But unlike many low-priced stocks, ORCL also has positive momentum. It has already moved up over 33% from the 52-week low in just a month between early April and early May.
Oracle became the poster child for AI overindulgence when the artificial intelligence trade consolidated from the end of October through March. But investor attitudes have changed again, and AI is back. ORCL is increasingly regarded as a stock that has been unfairly bludgeoned and is roaring back.
Companies require cutting-edge computer power and services to streamline the business and compete effectively. But they don’t have the capital resources or expertise to build out a computer infrastructure nearly as extensive as Oracle’s. It makes sense to tap into Oracle’s services for a fee. That way, they can compete at the highest levels by utilizing technological systems they could never build themselves.
The emergence of artificial intelligence has dramatically increased the need for Oracle’s services. Oracle offers a service called Oracle Cloud Infrastructure (OCI). The service is highly popular not only for what it provides but because it provides it faster and cheaper than the competition.
The growth potential is illustrated in the last quarterly report. OCI revenue grew 52% to $3 billion. While that’s impressive, management has said growth should eclipse 70% this year. The company recently reported $130 billion in order backlogs.
McKesson Corp. (MCK)
MCK has been a strong performer that has fallen 24% below the 52-week high. This rare price decline for an otherwise very strong performer that has returned just shy of 300% over the past three years, and the recent dip, presents a buying opportunity.
McKesson Corp. (MCK) is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. It has a solid base of over 40,000 customers and supplies about one-third of the U.S. drug distribution market. It’s a Goliath, with $398 billion in annual revenues.
McKesson buys drugs from manufacturers, delivers them, and resells them to retailers at a profit. It delivers from 1,300 producers to over 180,000 retailers by using 29 strategically located distribution centers throughout the country. Naturally, it has strategic partnerships with companies like CVS, Walmart, and Rite Aid. The extensive distribution network and enormous scale give McKesson tremendous bargaining leverage with suppliers and customers that can’t be easily duplicated by would-be competitors.
That’s why the business is an oligopoly. McKesson, along with Cencora Inc. and Cardinal Health, accounts for 90% of the drug wholesale distribution market in the United States. In addition, there are very high switching costs among the providers, so they rarely lose business to the other two companies.
Mckesson gets predictable earnings from the stable traditional pharmaceutical business while expanding capacity and the rapid-growth, high-margin, specialty drugs and biosimilars. McKesson has a huge share of a business that will grow all by itself because of the aging population. The recent decline in price presents an excellent entry point.
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