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The S&P 500 posted a fourth straight monthly gain in August, hitting record highs along the way. Despite some concern about the index being overvalued, there’s still some good value to be found. With the index’s price-to-earnings (P/E) ratio currently at 29.73, here are two US shares with ratios well below that.
A good defensive pick
Dollar General (NYSE:DG) is a US-based discount retailer that operates more than 20,000 stores, mainly in small towns and rural communities. Over the past year, the stock has soared by 46%, but importantly, the P/E ratio sits at 17.51, well below the index average.
Its business model is built around offering a wide assortment of low-cost household essentials, packaged foods, cleaning supplies, health & beauty products, and apparel basics. This makes it a defensive retailer, as demand for low-cost essentials tends to hold up even in tougher economic conditions.
Aside from just the attractive valuation, I think the stock looks appealing right now for other reasons too. For example, Dollar General has been taking steps to improve margins and store efficiency, while also expanding into fresh food and healthcare offerings that can drive higher traffic and repeat purchases. The latest quarterly results, released last week, showed that these steps are translating into improved earnings.
Net sales increased 5.1% versus the same period last year, with operating profit up 8.3%. This shows momentum is with the business. It could also help to push the share price even higher over the coming year. If earnings tick higher, the current P/E ratio doesn’t indicate to me that we’re in danger of it becoming a bubble any time soon.
One concern is that if the US economy starts to boom, in part due to faster-than-expected interest rate cuts, Dollar General could see lower demand as customers feel more confident spending money in more high-end stores.
A top-tier banking giant
Another idea is Morgan Stanley (NYSE:MS). The stock has a P/E ratio of 17.04, with the share price up 50% over the last year. The stock has benefitted over this time period from a mix of improving macroeconomic conditions and company-specific strengths.
For example, stock markets have rallied, boosting asset management fees, while a pickup in capital markets activity (like IPOs and debt issuance) has helped its investment banking arm recover from the pandemic lull. At the same time, wealth management inflows have been strong, reinforcing the firm’s strategy of focusing on stable, fee-based income.
Even with these positive factors, I think the stock has room to run higher over the coming year. I feel global markets are going to continue to be volatile, boosting earnings from the trading division. Demand for advisory services and wealth management is also likely to keep increasing, meaning that income from this area should be strong.
I do feel that interest rates in the US are likely to fall sharply over the coming year. This is a risk for the bank, which will experience a lower net interest margin as a result. Yet given the other areas of the business should perform well, I feel this negative impact can be offset.
I think investors can consider both US stocks as options when looking for better value in the S&P 500.
