Please ensure Javascript is enabled for purposes of website accessibility

Best Low P/E Stocks to Buy in September

By Rich Smith – Sep 22, 2016 at 2:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

By using a stock screener, we trip over a trend you may have missed.


Homebuilding, and housing industry stocks, are looking awfully cheap right now. Image source: Getty Images.

Spring and summer -- everyone knows they're the best seasons to buy a home, right? They're also, apparently, not a half bad time to look for low P/E stocks in the homebuilding industry.

Screening for value

This may sound surprising. But on a recent stroll through the stock rankings on free screener finviz.com, I stumbled across a surprising revelation: Some of the cheapest low P/E stocks available right now -- not just "low P/E," but objectively cheap bargains -- all hail from the homebuilding industry.

Here are a few of the offerings that popped up on a recent screen for mid-cap ($2 billion to $10 billion in market capitalization) stocks that sell for low P/Es, have produced fast growth rates (15% and up) over the past five years, and are expected to continue producing fast growth rates over the next five years as well.

USG Corporation

One of Warren Buffett's favorite stocks -- Berkshire Hathaway (BRK.A -1.25%) (BRK.B -1.31%) is USG's largest shareholder -- USG Corp (USG) is the No. 1 manufacturer of gypsum wallboard (i.e. "drywall") in the U.S., with a 26% market share. And despite its king-of-the-hill market position, the stock looks surprisingly cheap from a P/E perspective -- and a PEG perspective as well.

Priced at just 3.7 times earnings today, USG benefited from a large tax credit in last year's Q4, which inflated its profits and pushed down its P/E ratio. Earnings are expected to decline significantly after that windfall this year, and as a result, the stock's not quite as cheap as it looks. But profits should resume growing again pretty quickly. Overall, analysts quoted on finviz.com project a compound annual earnings growth rate of 25% for the stock over the next five years -- not much slower than the 29% growth rate it's produced over the past five years.

HD Supply

A second cheap "upstream" homebuilding industry stock is HD Supply (HDS), the construction materials wholesaler that owes its name to a 2007 spinoff from Home Depot (HD -2.29%).

Priced at just 5.9 times trailing earnings, HD Supply looks nearly as cheap as USG. Of course, as with USG, a big part of the reason the stock looks so cheap right now is that it enjoyed a windfall profit last year from a big tax credit. But also as with USG Corp, HD Supply looks pretty cheap even if no further windfalls are forthcoming. Earnings, although expected to fall sharply post-windfall this year, are expected to grow as much as 150% over the ensuing three years.

Longer-term, analysts expect to see HD Supply produce nearly 25% annualized earnings growth over the next five years. This, combined with a cheap P/E and a nearly as-cheap forward P/E, suggest the stock could make for an attractive investment.

Toll Brothers

Shifting our focus now away from suppliers of home "parts" and toward builders of actual homes, luxury homebuilder Toll Brothers (TOL -1.60%) offers an attractive P/E ratio of just 12.7. Like the other stocks so far surveyed, Toll boasts superb past-five-years earnings growth (151% annual) combined with strong prospective growth (19%) as well.

The stock's P/E isn't quite as cheap as the single-digit multiples we've seen so far with USG and HD Supply. On the other hand, Toll Brothers' profits haven't been inflated by any recent tax credits either, so it won't suffer a steep decline in profitability once the effect of such windfall profits subsides. Instead, Toll Brothers offers the prospect of investing in a strongly profitable stock whose profits will remain strong -- and, according to analyst estimates, continue growing stronger for many years to come.

There's a lot to like about such certainty.

PulteGroup

For that matter, if certainty and consistency are what you're after, then PulteGroup (PHM -1.57%) stock offers plenty on both scores. The stock's 13.1 P/E ratio is the highest of the "low P/E stocks" we've surveyed so far. That said, with a trailing five-year earnings growth rate of 20% and a projected long-term earnings growth rate of 19% -- well, you don't get much more consistent than that.

As an added bonus, PulteGroup is currently the only stock of these four that pays its shareholders a dividend -- currently yielding 1.8%. For anyone attracted to the stock for the consistency of its growth rate, the prospect of receiving consistent, steady dividend checks on top of the stock's own steady growth should be a welcome attraction as well.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Home Depot. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
BRK.A
$472,712.01 (-1.25%) $-5,963.54
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
BRK.B
$313.27 (-1.31%) $-4.16
PulteGroup Stock Quote
PulteGroup
PHM
$43.82 (-1.57%) $0.70
Home Depot Stock Quote
Home Depot
HD
$318.92 (-2.29%) $-7.46
USG Corporation Stock Quote
USG Corporation
USG
Toll Brothers Stock Quote
Toll Brothers
TOL
$46.07 (-1.60%) $0.75
HD Supply Holdings Stock Quote
HD Supply Holdings
HDS

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.