The recent escalation of trade tensions between the U.S. and China has caused stocks to retreat as investors worry that the trade war between the world’s two largest economies will be longer than expected. But some stocks that have been sold off have the potential to make some long-term gains, including Applied Materials Inc. (AMAT), BorgWarner Inc. (BWA), Charles Schwab Corp. (SCHW), Regeneron Pharmaceuticals Inc. (REGN), and Tapestry Inc. (TPR), according to Barron’s.
Not only are these stocks now trading at forward price-to-earnings ratios (P/E ratios) below the S&P 500’s forward multiple of 17.15 and their five-year averages, but they also have bright revenue growth prospects.
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What It Means for Investors
After hitting a high just above $60 a year ago, shares of Charles Schwab have fallen nearly 28% and are now trading at a forward P/E ratio of 15.2 compared to a five-year average of 22.1. Last quarter’s revenue for the financial services firm grew 14%, marking a 15th consecutive record, and Wall Street expects such healthy growth to continue for years to come. “They’re a low-cost leader, which is great for gathering assets,” said Brian Yacktman, manager of the YCG Enhanced fund, to Barron's.
Regeneron shares hit a high of more than $600 almost four years ago and are currently trading 50% lower at a forward multiple of 13.6 even though earnings per share (EPS) have doubled over that period. Regeneron has been hit, like the rest of the pharmaceutical sector, by fears that policy makers will limit the prices they are able to charge for their drugs. But amid these fears and competitive battles with other drug makers, the company is expected to see EPS growth of 5% a year compounded over the next five years, according to consensus estimates.
While these stocks look extremely cheap compared to recent history and appear to have promising growth prospects, there’s no telling how long it will take before China and the U.S. settle their trade disputes. If the trade war becomes long and drawn out, these stocks could, along with much of the rest of the market, take a much deeper plunge.