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Fool TV
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August 20, 2010
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NYU professor Aswath Damodaran has surveyed prior research and found that low P/E stocks outperform high P/E stocks by anywhere from 9% to 12% per year on average -- a very significant advantage.
But many low P/E stocks carry the risk of low growth prospects, deteriorating balance sheets, skepticism about earnings, or a high risk of filing for bankruptcy protection. Thus, for a company to be truly undervalued, Damodaran says in his book Investment Fables, "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."
Fool analyst Rex Moore built a screen incorporating Damodaran's suggestions for finding such stocks. The screen looks for all companies in a certain industry with market caps more than $500 million, and requires:
- Total debt less than 60% of capital.
- Annualized EPS growth of 5% or better over the past five years, and projections for the same over the next five.
Here are the lowest P/E stocks that passed the screen from four different industries:
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Industry
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Company
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Forward P/E
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Retail
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Rent-A-Center (Nasdaq: RCII )
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7.7
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Technology
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Micron Technology (NYSE: MU )
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4.2
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Consumer Staples
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Sanderson Farms (Nasdaq: SAFM )
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8.3
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Energy
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Transocean (NYSE: RIG )
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7.4
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Source: Capital IQ, a division of Standard and Poor's.
See the links below the video for more detailed screening from various industries.
Watch the video here:
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For more analysis, visit FoolTV.com.
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