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3 Stocks Trading at Bargain Prices

Judging by the S&P 500 index, American shares now trade at 18 times forecast 2009 earnings. That’s easily a third more expensive than their historical average. Wall Street analysts predict a 35% surge in corporate profits next year. If they’re right, today’s stock ticker prices are fair or close to it. If they’re wrong, look out below.

Cautious investors ought to keep some cash handy and focus their buying on cheap companies. There aren’t many deep discounts to be found. I recently searched for single-digit price earnings ratios and found enough, but when I also demanded sales growth during the last quarter and dividend yields of at least 2%, the list shrank to about 50. A good third of them were insurers, mortgage brokers and shippers — companies for which single-digit P/Es are normal. Below I’ve highlighted three of the remaining names.

Northrop Grumman

Forward P/E: 9.6

U.S. military spending seems to be on the public’s mind. According to Digg.com, a site where users recommend news stories, one of this week’s most popular submissions isn’t a story at all but a map that puts America’s defense spending at 48% of the world’s total. Next year the U.S. Department of Defense performs its quadrennial review of programs. With this year’s budget deficit projected to top $1 trillion, Reuters reports that the military branches have been told to find $50 billion to $60 billion in savings over five years.

That bodes poorly for military contractors, who depend mightily on defense budget increases for their sales growth, but their meager valuations seem to factor in deeper cuts than Congress is likely to pass. Several defense companies turned up on my search. Northrop Grumman (NOC), a ship maker, is only modestly indebted and offers a 3.9% dividend yield. Its backlog of business fell 8.5% last quarter but still tops $70 billion — about two years’ worth of sales.

PDL BioPharma

Forward P/E: 7.2

How does an 11.7% dividend yield sound? Assuming PDL BioPharma (PDLI) continues paying 50 cents a share twice a year, that’s just what its stock tickerholders will receive. There’s a catch, of course. The company has no operations, per se, but rather owns and extracts royalties from a series of patents that expire in 2013 and 2014. The patents are for antibody products used to make drugs like Herceptin and Avastin for breast, colorectal and other cancers; Synagis for lung infections; and Tysabri for multiple sclerosis. Swiss drug giant Roche, which bought Genentech this year, contributes about 70% of PDL’s royalties. Sales for PDL are expected to increase 12% this year and 8% next year. As sales increase, so should dividends. The payments won’t last forever, but today’s shareholders should end up with yearly returns that will rival those of corporate bonds using conservative forecasts, and which could easily hit double digits if key drugs sell well.

United Online

Forward P/E: 6.7

Not all Internet businesses are leading-edge. United Online (UNTD) owns dated properties like NetZero and Juno, which offer dial-up and broadband Internet connections; Classmates.com, which is presumably for people who haven’t heard of Facebook; and FTD, a rival to 1-800-FLOWERS that’s so old that the T originally stood for “Telegraph.” Unexciting as those businesses sound, they generate copious amounts of cash. United will likely grow its profits this year and reward stock tickerholders with a 4.4% dividend yield. That’s far more than can be said for Yahoo (YHOO) and eBay (EBAY).

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