Bill Nygren is looking to stocks with 'unsustainably low' price-earnings ratios. Here are his picks

Published Wed, Oct 12 20221:41 PM EDTUpdated Wed, Oct 12 20222:57 PM EDT

The volatile market is pushing some cyclical stocks' price-earnings ratios to levels that Bill Nygren, portfolio manager at Oakmark Funds, sees as "unsustainably low." Those are the stocks he wants to buy. "When the markets are really volatile like they have been, that tends to lead to an increase in the distribution of P/E ratios," Nygren said on CNBC's "Squawk on the Street." "And as that widens, I think that creates more opportunity for stock pickers." Nygren said that recession fears are driving down companies' P/E ratios. This number is what you get when you divide a stock's price by the annual earnings per share. It's a method used to assess a company's value. Nygren said stocks that are currently selling at lower-than-typical P/E ratios have long-term value for investors who can wait out current pressures on company earnings and share values. He said Oakmark last quarter bought Fortune Brands , the company known for its home and security goods brands including Moen and Master Lock. The stock is down about 46% year to date, and its P/E ratio based on next year's earnings is 8.9, according to FactSet. Nygren said he doesn't believe investors fully realize the company's cabinet business. Oakmark also bought Warner Bros. Discovery , which is down 50% this year. AT & T's WarnerMedia was removed from the cable giant and merged with Discovery earlier this year , creating the new WBD stock symbol. Its P/E ratio based on next year's earnings is 23.9, according to FactSet. Oakmark is now the media giant's largest shareholder, aside from index funds, according to CNBC's David Faber. Nygren said the stock was interesting because Discovery purchased Time Warner assets from AT & T for less than half of what the telecom giant paid for them five years ago, while the Warner Bros. content library continues to go up in value. While he said the library was "not particularly well managed" under AT & T, he sees an opportunity for the company to be a streaming leader going forward. "Warner has done a great job of making must-see content," Nygren said. "And we believe that one way or another, the company is going to be successful at monetizing that." Nygren also is still interested in Netflix , which he said has been a "very good performer" over the past few months despite having a rocky run earlier in the year. He said the company's plans for an ad-supported tier and the monetization of password sharing will help it hit double-digit growth alongside expanded cost savings. His positive view of the streaming giant is also helped by the low churn rate, he said. He added that the streaming stock is "not that expensive." Its P/E ratio based on next year's earnings is 20.4, according to FactSet. Shares are down about 63% year to date. Nygren said Uber is still worth holding despite concerns over the impact of a federal proposal that could lead to gig workers being reclassified as employees rather than independent contractors , which would raise costs for Uber and its competitors. He does not believe this change will occur, pointing to a similar proposal in California that was deemed unconstitutional. "As people dug deeper and understood it better, they realized it wasn't good for the drivers, it wasn't good for consumers and it didn't pass," he said of the California proposal. Nygren said the stock as it stands is appealing because of its free cash flow yield of nearly 10% on expected earnings in 2024. He noted that is without including Uber Eats, which could add 25% to the company's market cap. Uber, which is down 38% this year, could post double-digit growth rates in the future, he said. The company is expected to lose money next year, according to FactSet, and so the stock does not have a P/E ratio.