10 cheap stocks for an overvalued market

Published Wed, Jun 3 20158:47 AM EDTUpdated Wed, Jun 3 201510:24 AM EDT

An increasing number of research firms are pointing to high valuations as one of the main factors holding back the bull market, which is now in its sixth year. The latest example is S & P Capital IQ's Global Market Intelligence team, which wrote the following in a note to clients: "Barring a possible economic recession, or the presence of a stock market 'bubble,' [the S & P 500 price] places the existing price-to-earnings (P/E) ratio toward the upper end of the historically normal range for stock market valuation." The current forward P/E multiple for the S & P 500 stands at 17.4 times, according to S & P Capital IQ, placing it near the high end of its normalized trading history of 18 times. Since 1936, there have been only five instances of sustained P/E ratios in excess of 18 times, with each of those occurrences involving a significant pullback after that milestone. So in this "fully valued" market, CNBC Pro found some of the stocks that are trading at a discount to their historical metrics and have solid growth expectations for the future. Using a proprietary method to scan for valuations, we first ran a screen of 900 mid- and large-cap S & P companies in order to find the names with P/E ratios below their historical average. Read More Top stock picker's strategy for the second half Once we narrowed down the list, we then searched for the names where analysts predict earnings to grow in the next 12 months. Among those firms, we searched for the ones with sound fundamentals, such as positive cash reserves and moderate debt levels as well as a dividend yield. Some of the names in our report include Merck , H & R Block and Emerson Electric —all three are trading at a more than 15 percent discount to the historical P/E average, and offer dividend yields above 2.5 percent. To be sure, S & P Capital IQ says that the existing valuations are not "egregiously rich" to mandate a long overdue correction in market prices. However, the firm notes that history does suggest the market is "vulnerable to an unexpected exogenous shock," including a potential GDP/earnings recession .

A Merck sign in front of the company's building in Summit, New Jersey.

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An increasing number of research firms are pointing to high valuations as one of the main factors holding back the bull market, which is now in its sixth year.

The latest example is S&P Capital IQ's Global Market Intelligence team, which wrote the following in a note to clients: