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Most experts agree that there’s a fair bit of speculative excess in the stock market right now. In some areas of the market, we appear to have classic ‘bubbles’ – where valuations are detached from the fundamentals.
Yet not every area of the market is overheated at present. Some stocks actually look dirt cheap.
Is AI a bubble?
There’s been a lot of talk about a bubble in the artificial intelligence (AI) space recently. I don’t see it though.
At present, Nvidia, Alphabet, Meta, Amazon, and Microsoft – the companies spearheading the AI revolution – trade on forward-looking price-to-earnings (PE) ratios of between 24 and 33. High valuations yes, bubble no.
Soaring valuations
I’m seeing bubbles in other areas though. Quantum computing is one.
At present, many stocks in this space have price-to-sales ratios (not price-to-earnings) of 500 to 1,000. That seems detached from reality.
Pockets of the energy industry also seem to have soared into bubble territory. For example, in the nuclear space, Oklo now has a market cap of $24bn despite having no revenues.
I think investors need to be careful in these areas of the market. Recently, many stocks have gone parabolic and that kind of share price action usually ends in tears.
An undervalued sector
The good news for sensible long-term investors is that some sectors look really cheap at the moment. Healthcare is a good example.
It ‘s been out of favour for a while now and as a result, a lot of stocks in the sector sport bargain-basement valuations. For instance, UK-listed companies GSK (LSE: GSK), Hikma Pharmaceuticals, and Smith & Nephew currently trade on forward-looking P/E ratios of 9.1, 9.5, and 14, respectively.
A cheap blue-chip dividend stock
Zooming in on GSK, this stock looks like a steal on a P/E ratio of 9.1, if you ask me. This is a blue-chip pharmaceutical company that operates in several important areas including oncology (cancer) and vaccines.
Sure, it hasn’t set the world on fire in recent years. But there’s a new CEO coming in next year (Luke Miels) and I expect him to try to boost growth with new product launches, strategic acquisitions (perhaps in the weight-loss space), and new technology.
Now, next year, analysts expect GSK to generate earnings growth of around 10.4%. So, right now, the stock has a price-to-earnings-to-growth (PEG) ratio of just 0.9.
With this ratio, a number under one is generally a signal that there’s value on offer. So, we appear to have a bargain here.
Of course, US regulation is creating some uncertainty for pharma companies like GSK right now. Not only are tariffs an issue but so are drug price negotiations.
At the current valuation though, and with a dividend yield of around 4% on offer, I think there’s probably a decent margin of safety here. In my view, if someone is aiming to build a solid long-term investment portfolio, this stock is worth a look.
