Now that the Dow Jones Industrial Average has hit an all-time high, investors may be naturally wondering what’s next. What goes up must come down, as the saying goes, and consequently you may be anticipating a correction in the offing. Before you resign yourself to worrying about the next direction the market will take, you can protect yourself by considering stocks that aren’t trading at exorbitant valuations.
Buying stocks while they’re cheap is a great way to insulate yourself against market volatility. If you do some research into stocks that are trading for valuations below that of the broader market, you can provide yourself a margin of safety. Furthermore, if you focus on dividend-paying stocks, you can provide your portfolio an additional layer of stability through reliable quarterly returns.
Some under-the-radar candidates
Garmin Ltd. (NASDAQ:GRMN) designs and manufactures its namesake global positioning systems (GPS). The Swiss company pays a quarterly dividend of $0.45 per share, representing an annualized 5.3% yield at recent prices. In addition, Garmin Ltd. (NASDAQ:GRMN) reported diluted earnings per share of $2.76 for fiscal 2012, meaning the stock now trades for a very reasonable 12 times its trailing diluted EPS.
Despite Garmin Ltd. (NASDAQ:GRMN)’s extremely high dividend yield and attractive valuation, there are warning signs investors would be wise to monitor going forward. Garmin Ltd. (NASDAQ:GRMN)’s revenue declined by about 1.5% in its most recent fiscal year, and the company has faced severe challenges to its business model over the past few years. GPS is becoming more commonly utilized from cell phones and other mobile devices, and as a result, Garmin Ltd. (NASDAQ:GRMN)’s sales are stagnating. The company’s revenue is still down 22% since 2008.
Cal-Maine Foods Inc (NASDAQ:CALM) is a name that might not ring a bell, but its business model surely isn’t complicated. The $1 billion stock produces and sells eggs under the Egg-Land’s Best, Farmhouse, and 4-Grain brand names. In fact, Cal-Maine is the largest producer and marketer of shell eggs in the United States.
Cal-Maine Foods Inc (NASDAQ:CALM) switched to a variable dividend policy in 2007, which is something to keep in mind. Instead of paying a fixed amount, investors receive approximately one-third of the company’s net income under Generally Accepted Accounting Principles (GAAP). This might be an understandable source of confusion, since you won’t know exactly what you’ll receive every quarter until it is declared.
However, Cal-Maine’s profits are sound enough that shareholders are still generously rewarded. Cal-Maine paid $1.34 per share in dividends in 2012, which would represent a greater-than 3% yield at recent prices. Even better, the stock trades for only 11 times its trailing earnings per share.
Foot Locker, Inc. (NYSE:FL) is a $5 billion retailer of athletic footwear and apparel. As of January 2012, the company operated more than 3,300 of its Foot Locker, Inc. (NYSE:FL) stores in 23 countries in North America, Europe, Australia, and New England.
Foot Locker, Inc. (NYSE:FL) reported fiscal 2012 net income of $2.47 per share, excluding the benefit derived from a 53rd week, which represented a 36% improvement year over year. Same-store sales, which measure sales only at locations open at least one year, increased 9.4% in 2012. In addition, the company produced a 14.2% return on invested capital in fiscal 2012.
Despite Foot Locker, Inc. (NYSE:FL)’s strong growth numbers and extremely effective management, the stock remains attractively priced. Even with the S&P rapidly approaching its record high, Foot Locker, Inc. (NYSE:FL) hasn’t rallied extensively and still trades for only 13 times its 2012 net income per share.