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Plenty of Cheap Stocks to Invest In, Buffett Says

Even with the market on a historic roll, there are plenty of cheap stocks to invest in, says Warren Buffett. It has everything to do with interest rates.

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U.S. stocks have been on a historic tear of late, with the Dow Jones Industrial Average just coming off its longest streak of consecutive “up” days in 30 years. With the market extending further into record territory on a daily basis, you would think there wouldn’t be a whole lot of cheap stocks to invest in right now. But according to value investing legend Warren Buffett, there are plenty of bargain stocks out there.

Here’s exactly what Buffett said, in an interview with CNBC on Monday:

“Measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is interest rates go up, and that brings stocks down. If interest rates were at 7 or 8%, then these prices would look exceptionally high.”

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Instead, interest rates, based on the federal funds rate set by the Federal Reserve, are in the 0.50%-to-0.75% range. Big difference. Because interest rates are so low, Buffett says a good stock is a better investment than a short-term bond or a U.S. Treasury note. It’s why the world’s foremost value investor has poured $20 billion of his own money into stocks in the last four months.

If you look strictly at valuations, there aren’t a lot of cheap stocks to invest in right now. At 26.6 times earnings as of this writing, the S&P 500 is trading at its loftiest P/E since 2003. But if Warren Buffett insists that stocks are cheap, who are we to argue with him?

Going by where he spent his money on his recent shopping spree, Buffett clearly thinks Apple (AAPL) is an undervalued stock. He more than doubled his stake in AAPL last quarter, purchasing 130 million shares. So far, that looks like a pretty good investment: Apple stock is up 23% in the last three months, and has kited from 105 in mid-November to 137 now. Despite that, it’s still technically undervalued even by traditional measures, with a P/E of just 16.

However, Monsanto (MON) is another stock Buffett loaded up on recently, and it currently trades at a hefty 31 times earnings—not cheap by traditional measures. That shows that Buffett is casting a wide net on what he deems cheap stocks in this market. Perhaps you should do the same—don’t be scared off by a high price-to-earnings or price-to-sales ratio. Because with the market nearly four months deep into a seemingly unstoppable rally, most stocks are overvalued by the usual measuring sticks.

If you want help uncovering cheap stocks to invest in right now, I recommend taking out a subscription to one of our two value investing advisories: Roy Ward’s Cabot Benjamin Graham Value Investor newsletter or Crista Huff’s Cabot Undervalued Stocks Advisor newsletter. The former has actually beaten Mr. Buffett’s portfolio by a wide margin over the last 21 years; the latter currently has five stocks in its “Buy Low Opportunities Portfolio” with double-digit total returns.

With plenty of bargain stocks still out there, both Roy and Crista have lots of good value recommendations to consider!


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .