LONDON -- The FTSE 100 has risen by 25% over the last year, and many top shares are beginning to look quite expensive. I'm on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I'm using a special version of the price-to-earnings ratio called the PE10, which is one of my favorite tools for value investing.

The PE10 compares the current share price with average earnings per share for the last 10 years. This lets you see whether a company looks cheap compared to its long-term earnings.

Today, I'm going to take a look at the PE10 of the U.K.'s fourth-largest supermarket chain, Wm. Morrison Supermarkets (LSE:MRW) (NASDAQOTH:MRWSY).

Is Morrison a buy?
Morrison's belated launch of an online service, in partnership with Ocado, has hit the headlines in recent weeks. However, the firm's market share keeps slipping: It dropped to 11.6% during the 12 weeks to June 9, according to retail experts Kantar Worldpanel.

Morrison reported a 1.8% drop in like-for-like sales during the first quarter of its current fiscal year, following a 2.2% decline last year. However, it said it was on track to deliver growth, with a target of 100 M local convenience stores by the end of this year and online food operations due to begin in January 2014.

Morrison believes these initiatives will stem its declining sales and market share, but does it look cheap enough to buy? Let's take a look at Morrison's current P/E ratio and its PE10:

 

Trailing
P/E

PE10

Morrison

10

16.9

Morrison shares currently trade on a multiple of just 10 times last year's earnings, which looks good value at first glance. However, it may be worth noting that the firm's current share price gives it a PE10 of 16.9, compared to 14.8 for Tesco and 18.3 for Sainsbury. To me, this suggests that the supermarket sector is fully priced at the moment, given the challenges it faces.

I'm concerned that Morrison's growth opportunities may be limited. On the one hand, it's smaller than Tesco, Sainsbury, and Asda, and it lacks the upmarket appeal of Waitrose. On the other hand, Morrison can't compete with the aggressive discounting of Aldi and Lidl, whose market share continues to grow.

Morrison offers an attractive 4.8% prospective yield, but I think the company's shares are fairly valued at the moment, and I rate them a hold.

Can you beat the market?
Of course, that's only my opinion. Top U.K. fund manager Neil Woodford recently sold his Tesco shares and invested in Morrison.

Woodford's track record is impressive: If you had invested £10,000 into his High Income fund in 1988, it would have been worth £193,000 at the end of 2012 -- a 1,830% increase! You can find out about Woodford's eight largest holdings in this special Motley Fool report, which has been newly updated for 2013. This special report is completely free, but availability is limited, so click here to download your copy immediately.

Roland Head owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.