When investors buy an index fund, the fund must buy each of the underlying stocks in the index, in proportion to their index weight. This drives up demand for these stocks, pushing up their prices, asserts George Putnam, editor of The Turnaround Letter.
Large-cap stocks not in the S&P500 Index do not directly participate in the upward cycle and may get left behind, creating good long-term bargains.
Similarly, when the cycle reverses and investors bail out of index ETFs, stocks not in the index could decline less.
With these thoughts in mind, we searched for “left-behinds” — large-cap stocks that are not members of the S&P500 Index that look attractively valued. Here are two from the travel and entertainment sectors.
Las Vegas Sands (LVS)
This company is one of the world’s pre-eminent developers and operators of luxury hotels, gaming and dining/entertainment resorts, with 10 properties in the U.S., Macau and Singapore.
Profits were crimped a few years ago from declining business in Macau, but Macau gaming is on the rise again. Las Vegas Sands’ three Nevada properties are also doing well.
While not inexpensive at 23.2x, the shares remain 33% below their prior highs and trade at a discount to industry peer and S&P500 Index member Wynn Resorts (WYNN, at a 26.8x multiple).
Norwegian Cruise Lines (NCLH)
Norwegian is a leading global cruise company with 24 ships offering 46,500 berths. Like other major cruise lines, the company is seeing strengthening demand, better pricing and stable fuel costs.
Free cash flow is strong, helping to reduce Norwegian’s debt. Overall, the company is well-positioned to benefit from improving industry conditions and weather the weakness coming from Europe and South America.
The valuation is attractive at 13.8x this year’s earnings. NCLH shares trade at a discount to S&P500 members Carnival Cruise (CCL, at a 16.4x multiple) and Royal Caribbean (RCL, at a 14.2x multiple).
