Merck, Chevron, AT&T: Barron's names seven high-quality stocks trading at a discount to the market

Barron's has selected seven high-quality stocks that are trading at an average discount of 40% to the market based on their P/E ratio (price-to-earnings ratio).

Since March, speculative, "low-quality" securities have outperformed "high-quality" companies by 50 percentage points, according to analysts at UBS, whose note is quoted by the publication. But in 2026, the bank recommends that investors change their priorities: "The sharp rise in low-quality stocks looks unsustainable amid high uncertainty and strong overheating."

High-quality assets are securities issued by companies with stable, predictable, and profitable businesses and low debt levels, writes Barron's. In compiling the list, it relied on indicators such as free cash flow yield, ROE (return on equity), and recent ratings from investment banks.

— Merck, a pharmaceutical company. Its best-selling drug Keytruda, which boosts the immune response to cancer, was launched more than ten years ago, and the main patents will begin to expire in 2028. However, in November, Wells Fargo analysts recommended buying the company's shares, expecting it to grow until the 2030s, according to Barron's. Merck is actively using its free cash flow for M&A deals to offset a possible decline in Keytruda sales, and its portfolio of projects and research should yield important results in the next 18 months, the publication writes.

— Oil giant Chevron saw its shares rise 4% in 2025 despite falling oil prices. According to UBS, it is now the leader among companies engaged in exploration and production. The acquisition of Hess and the settlement of the dispute with Exxon gave Chevron access to huge reserves in Guyana. With the average price of Brent crude at $70 per barrel, the company's free cash flow will grow by 10% per year over the next five years, UBS predicts.

— Expedia Group, which provides online travel booking services, boasts attractive free cash flow and a 53% increase in its share price since the beginning of the year, but it is not popular on Wall Street. Only a third of analysts recommend buying its shares, according to Barron's. The company lags behind its competitor, Booking Holdings, in terms of scale and especially in the hotel segment, which is much more profitable than flights and car rentals. However, after a change of CEO in November,

Expedia significantly exceeded market expectations for bookings — its shares soared 18% that day, the publication recalls.

— Shoe manufacturer Deckers Outdoor, owner of the UGG brand, may soon change its flagship product due to growing demand for Hoka sneakers, Barron's notes. Since the beginning of the year, Deckers shares have lost half their value. However, in November, Stifel recommended buying them, expressing confidence in the company's ability to increase Hoka sales by approximately 10-13% and UGG sales by 1-5% per year.

— Telecom provider AT&T underwent a transformation, divesting itself of media and satellite TV in 2021-2022 and directing its free cash flow toward debt reduction, dividends, and fiber optic development to compete with cable operators, Barron's notes. AT&T shares have outperformed the market over the past two years but fell in September, providing an entry point, the publication believes. In November, KeyBanc advised buying the company's shares, saying that concerns about the mobile business are exaggerated and that the combination of "mobile communications and home Internet" increases margins and reduces customer churn. Barron's also draws attention to AT&T's dividend yield of 4.6%.

— Car manufacturer General Motors has outperformed the market over the past two years, adding 135% to its value, according to the publication. Demand for electric vehicles is declining and incentives have been eliminated, but GM did not bet heavily on this sector, unlike Ford, and avoided losses, Barron's writes. In December, Morgan Stanley recommended buying GM shares, noting the focus on profitable models with internal combustion engines. The P/E ratio of these securities is only 8, compared to 25 for the S&P 500, and earnings per share are expected to grow at a rate of 15% per year, the article says.

— Advertising company Omnicom Group has lagged significantly behind the market over the past two years amid concerns about the advertising market and the dominance of digital giants such as Amazon, explains Barron's. Since the beginning of 2025, its shares have lost about 7%. In November, Omnicom announced the purchase of Interpublic, creating the world's largest advertising holding company. In addition, it plans to optimize costs, in particular by reducing the number of offices and employees. According to UBS estimates, by 2027, savings will reach $1 billion per year, profitability will increase, and a $2 billion share buyback will be carried out. Omnicom shares recently traded at a P/E ratio of 7, which is a very attractive valuation, according to Barron's.

In addition to stocks, Barron's drew attention to ETF funds, which select high-quality stocks and are also traded at a discount to the market.

— The Pacer U.S. Cash Cows 100 ETF builds its portfolio based on the FCF yield, which shows how much free cash flow a company generates relative to its market capitalization. The fund trades at a multiple of about 15, while the underlying index shows impressive momentum, Barron's writes.

Jared Woodard of Bank of America highly rates the fund, which was launched just two years ago and has already outperformed the S&P 500 by several points — VictoryShares Free Cash Flow ETF. The fund's algorithm first selects companies based on their FCF yield, and then on their revenue and profit growth. Its P/E ratio is 14.

This article was AI-translated and verified by a human editor