One of the most common questions investors ask is simple: “How’s the market doing?”
However, seasoned investors understand that the stock market is really a market of stocks, not simply a stock market. Even when the overall index appears overvalued, individual companies within that index can still offer attractive opportunities.
In this second installment of our series, Chuck Carnevale, co-founder of FAST Graphs and widely known as Mr. Valuation, takes a deeper dive into the S&P 500 to demonstrate how investors can uncover potential opportunities within an otherwise expensive market.
Using the powerful research capabilities of FAST Graphs, Chuck walks through how investors can analyze valuation, earnings growth, and fundamentals to identify stocks that may offer attractive potential for growth, income, or a combination of both.
Watch the Video
Undervalued S&P 500 Stocks For Growth & Income, or Both (Part 2)
In this video Chuck will cover: Realty Income (O), Ameriprise Financial(AMP), Campbell Soup (CPB), Apple (AAPL), Microsoft(MSFT), Nvidia (NVDA), Fiserv (FISV), Charter Communications(CHTR), Globe Life (GL), OmnicomGroup (OMC), American International Group (AIG), EPAM Systems (EPAM), Cigna Corp (CI), General Mills (GIS), Global Payments(GPN), Cardinal Health (CAH), ConagraBrands (CAG)
A Market of Stocks, Not a Stock Market
Although the S&P 500 index may appear overvalued at the moment, it is important to remember that the index represents 500 individual companies, each with its own unique fundamentals, earnings growth prospects, and valuation.
By using the portfolio and screening capabilities inside FAST Graphs, investors can analyze the individual constituents of the S&P 500 and sort them by important metrics such as earnings yield, dividend yield, price-to-operating cash flow, and other valuation measures.
This approach allows investors to quickly identify companies that may be trading below their intrinsic value — even when the overall index appears fully valued or expensive.
In other words, while the index may appear overvalued, opportunities may still exist beneath the surface.
The Importance of Valuation
At the core of Chuck’s analysis is one of the most important principles of successful investing: valuation matters.
When an investor purchases a stock at or near its fair value and later sells it when it again trades near fair value, the investor’s return will generally track the company’s underlying earnings growth. In this situation, the investor fully participates in the company’s operating success.
Chuck illustrates this principle using several examples. Companies like Ameriprise and Campbell’s Soup demonstrate how purchasing a stock at reasonable valuations can result in returns that closely mirror the company’s earnings growth.
However, when investors overpay for a stock, the outcome can be very different. Even if the company continues to grow earnings, an excessive starting valuation can compress future returns and in some cases even lead to losses.
Growth Stocks and Valuation
The video also examines several well-known growth companies, including Apple, Microsoft, and NVIDIA.
These examples illustrate that even exceptional businesses can produce very different investment outcomes depending on the price paid for the stock. When purchased at reasonable valuations, investors may capture the full benefit of the company’s earnings growth. When purchased at inflated valuations, however, future returns can be reduced as valuations eventually normalize.
For high-growth companies such as NVIDIA, Chuck discusses the P/E equals growth concept popularized by Peter Lynch, sometimes referred to as the PEG ratio. When a company’s valuation aligns reasonably with its expected growth rate, investors may have the opportunity to participate more fully in that growth.
Finding Opportunities Within the S&P 500
Despite the overall market appearing expensive, Chuck highlights several companies within the S&P 500 that currently appear attractively valued relative to their fundamentals and growth expectations.
Examples discussed include companies such as Fiserv, Charter Communications, Globe Life, Omnicom, and others. These companies demonstrate how investors who focus on individual businesses — rather than simply the index — may uncover opportunities for both growth and income.
However, Chuck emphasizes that valuation alone is not enough. Investors should also examine factors such as earnings consistency, balance sheet strength, analyst estimates, and the overall quality of the business.
One of Chuck’s preferred starting points for deeper research is the company’s own investor relations website, where management presentations and financial disclosures can provide valuable insight into the company’s strategy and future prospects.
Final Thoughts
The key takeaway is straightforward but powerful.
In the long run, earnings drive stock prices. In the short run, emotions drive stock prices.
Successful investors focus on the fundamentals of the businesses they own, the earnings those businesses generate, and the valuation they pay for those earnings.
Even when the overall market appears expensive, careful analysis can uncover companies that may offer attractive long-term opportunities.
As Chuck often reminds investors:
Valuation matters — and it matters a lot.
Disclosure: Long O, AMP, AAPL, MSFT, NVDA, FISV, OMC, CI, GIS, GPN, CAG
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
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