Finding Safe Low P/E Stocks

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:

Industry

Company

Forward P/E

Retail

Rent-A-Center (Nasdaq: RCII  )

7.7

Technology

Micron Technology (NYSE: MU  )

4.2

Consumer Staples

Sanderson Farms (Nasdaq: SAFM  )

8.3

Energy

Transocean (NYSE: RIG  )

7.4

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:

More Best Value Foolishness:

For more analysis, visit FoolTV.com.

Fool analyst Rex Moore loves ice screen. He owns no companies mentioned here. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

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  • Report this Comment On August 20, 2010, at 4:34 PM, MellowGuy1 wrote:

    RCII has no tangible book value, making it a possibly risky stock.

  • Report this Comment On August 21, 2010, at 10:21 AM, admini75 wrote:

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  • Report this Comment On August 21, 2010, at 3:38 PM, MegaEurope wrote:

    MU's recent earnings seem anomalous among their massive losses the past few years. I don't think they are "safe".

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