This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

8 Undervalued Stocks Getting Help From the U.S.

BOSTON ( TheStreet) -- Conservative investors may well want to consider stocks with the highest market values, especially those with a U.S. focus.

An analysis of their valuations by Fidelity Investments concludes they are selling at 20-year lows and "appear significantly undervalued" and, thus, ready for a breakout after a decade of middling performance.

Mega-cap stocks, represented in the study by the 200 biggest companies in the Russell 1000 Index, have traded at an average trailing price-to-earnings (P/E) ratio of about 19 over the past 20 years, but currently have a P/E of less than 14, a low for the 20-year period. They would need to rise more than 20% just to revert back to their historical norm, the report said.

And on a relative valuation basis, they are also trading at a 20%-plus discount to midcap stocks now.

Matt Fruhan, one of the report's authors and portfolio manager of the $1.8 billion Fidelity Mega-Cap Stock Fund (FGRTX), wrote that, adding to their appeal, the mega caps are typically stocks of high-quality, predictable companies paying healthy dividends. And they're clearly in a position to increase them, given that as of mid-July, the companies in the study had a trailing 12-month free cash flow yield of 6.5% and a dividend yield of only 2.2%, which gives them plenty of room "to close that gap and substantially increase their dividend payout."

"If this valuation gap persists and tax policy continues to treat dividends similarly to capital appreciation, which we should know more about after the fall elections, we expect some management teams to shift free cash flow away from buying back shares in favor of returning capital to shareholders in the form of dividends," said the report's co-author, Fidelity institutional portfolio manager Naveed Rahman. "The opportunity to increase dividends substantially is one of the many reasons we believe mega caps are so attractive."

The report concludes that "the recent extended underperformance against midcaps, suggests that the equity market may be poised for another shift in leadership toward mega caps," although for now, the biggest stocks are "persistently under-owned" by most active investors, even those with portfolio allocations to large-cap mutual funds.

The Fidelity Mega-Cap fund is up 11.8% this year versus the S&P 500's 10% gain, and it is up an average 14% annually over three years, about that of the S&P 500's performance.

The fund's top five holdings, making up almost 21% of its portfolio, include iPhone maker Apple (AAPL), banking giant Wells Fargo (WFC - Get Report), investment house JPMorgan Chase (JPM), oil and chemicals conglomerate ExxonMobil (XOM), and another oil giant, Chevron (CVX).

To take a conservative mega-cap investment approach a step further, investors may find a xenophobic strategy of picking the stocks of those companies with most of their revenues coming from domestic sources a way to further mitigate risk, given Europe's sovereign debt miasma and China's wobbly economy.

With that in mind, here are eight stocks in the Fidelity Mega-Cap Fund with a decidedly domestic focus to their revenue sources, in inverse order of their share-price gains this year:
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
TW $123.00 -4.25%
CMCSK $58.00 -2.83%
MCK $165.01 -1.87%
TGT $79.71 -0.35%
WFC $48.94 -1.37%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs