With the S&P 500 touching another 52-week high on Monday, investors need to be increasingly careful. Any new stock buys could be coming in the later stages of a mini-rally that began around Labor Day weekend. So it pays to move down the risk curve by focusing on cheaper stocks that still possess upside but are also more likely to hold their own in any market pullback.

Even with the recent rally, roughly 15% of the stocks in the S&P 500 still trade for less than 10 times next year’s earnings. Some deserve to trade on the cheap, yet others are simply out of favor now but would fare better as the economic cycle builds. Let’s take a closer look…



Cheap — and will probably stay that way
I excluded insurance and financial stocks from the stock screen you see in the table above. Right now, it’s hard to make a case for stocks in either of these sectors. I also eliminated oil and gas plays from the list, as they are never going to be “big multiple” stocks.

Other individual stocks are likely to perpetually sport single-digit multiples. Dean Foods (NYSE: DF), GameStop (NYSE: GME) and Lexmark (NYSE: LXK) are all examples of companies that have simply run out of organic growth prospects, and it’s hard to know what might get growth going again. Other companies such as defense contractors General Dynamics (NYSE: GD), L-3 Communications (NYSE: LLL) and Raytheon (NYSE: RTN) are buckling down for possible cuts in defense spending and few expect that situation to reverse until our budget deficits have been tamed.

We’ve covered some of these names recently. For example, near-term headwinds may explain why shares of Ford Motor (NYSE: F) still appear cheap on a price-to-earnings (P/E) basis. [Read my analysis here for an explanation]

And what I wrote about Gannett (NYSE: GCI) back in June still applies today. Lastly, I recently noted that Dell (Nasdaq: DELL) executives are well aware of their stock’s dowdy valuation.

So where else does value lurk?

Jabil Circuit (NYSE: JBL)
Jabil is the world’s third largest contract manufacturer, making a wide range of electronic components, devices and systems for major tech companies like Cisco Systems (Nasdaq: CSCO), Apple (Nasdaq: AAPL) and Research in Motion (Nasdaq: RIMM). It’s not an especially sexy business, as Jabil and its peers need to settle for wafer-thin profit margins if they are to win business. But Jabil has a plan: Slowly migrate into newer industries such as medical devices and clean energy technology while also offering more advanced manufacturing services — all of which now appear to be pushing the company onto a path of higher profit margins.

Those efforts are already bearing fruit: Operating margins are now rebounding at a steady clip after wilting the past five years. Goldman Sachs believes they’ll exceed 4% in the current fiscal 2011 year (for the first time in its history), and should approach 4.5% in fiscal 2012. Throw in a forecast of rebounding sales growth, and Jabil should become a solid earnings growth story.

Sales grew +15% in fiscal (August) 2010, and should grow by a similar amount this year, thanks in large part to new customer wins (to make products that carry higher margins). That should help boost earnings per share (EPS) more than +30% this year, north of $2. In subsequent years, sales and profit growth should moderate. Assume sales growth in the +5% to +10% range, and profit growth at twice that level. Shares, which trade for around eight times projected 2011 profits look quite appealing in that context.

Whirlpool (NYSE: WHR)
Demand for washing machines, dishwashers and dryers has been in a slump ever since the housing bubble was pricked. Consumers are hanging on to them longer, fixing instead of replacing whenever possible.

Whirlpool saw its sales slump in recent years and is only now again back above the $18 billion revenue mark, a figure last seen in 2006. But the company is vastly different since then, with a much leaner cost structure, better exposure to more dynamic emerging economies and a far cleaner balance sheet. 
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The numbers tell it all. Whirlpool used to generate $200 to $300 million in free cash flow when the economy was healthy in the middle of the last decade. Yet free cash flow surged to $881 million last year, thanks to a sharply lower cost structure. The company is now expected to maintain its prodigious levels of free cash flow, even if sales growth remains muted.

Shares may look appealing at around seven times projected 2011 profits, but they’re even more attractive in the context of projected 2011 EBITDA, trading at just four times enterprise value. That figure is likely to grow even more appealing as Whirlpool looks to pay off the $1 billion in debt that it still carries. Within a few years, the housing industry may also be back on its feet, setting the stage for renewed top-line growth as well.

Shares of Whirlpool surged past $110 last spring on hopes of a rebounding economy. More tepid economic data points since then have pushed shares back down to $82, but a move up to $100 looks quite feasible simply based on near-term cash flow. And when demand starts to pick up, shares could easily move past the $120 mark — some +50% above current levels.

Action to Take –> The stocks I mentioned above are all good candidates, but you could use this list as a starting point for further research. Many of these stocks are quite cheap simply because they have not yet seen any major benefit from the recent stabilization of the  But these “late cycle” plays look set to garner more affection in 2011, assuming the economy can build a head of steam. If that doesn’t happen, these low multiples ensure that they don’t have far to fall.