The price to earnings ratio (P/E) has to be one of the most overused valuation tools in history. It's staring you in the face on every stock summary page and every stock screener I've ever run across. There's just no way to escape it.

Or can you? Companies without earnings can't have a P/E -- dividing by a negative number makes the formula pretty useless -- so why not look at companies that have red at the bottom of the income statement to find some potential gems that just need a little polishing?

In looking at companies with negative GAAP earnings, we're going to find one of two things:

  • Companies with one-time charges dragging down earnings, which doesn't affect the true nature of the company.
  • Companies that aren't profitable now, but have the potential to be so in the future.

In both cases, we can eliminate the chaff by screening for just companies that garner four- or five-star ratings -- the best of the bunch -- from our Motley Fool CAPS investor intelligence database, and eliminate the penny stocks by adding a minimum market cap.

You can find the results of the simple -- and yet so potentially lucrative -- screen right here, and here's a sampling of the companies that came out of the screen to get you started. Proceed with caution; these are just starting points for further research.

Company

Market Cap
(in billions)

EPS

CAPS Rating
(5 stars max.)

Freeport-McMoran Copper & Gold (NYSE:FCX)

$15.9

($29.72)

****

ConocoPhillips (NYSE:COP)

$59.7

($11.16)

*****

Alcoa (NYSE:AA)

$6.2

($0.09)

****

Celgene (NASDAQ:CELG)

$21.2

($3.46)

****

NVIDIA (NASDAQ:NVDA)

$5.7

($0.05)

*****

Source: Motley Fool CAPS.

Normally a $29.72 per share loss on a $39 stock would be a sure sign to run the other way, but Freeport's loss isn't nearly as bad as it looks. The company took a $34.51 a share loss in the fourth quarter to write-down inventory, related largely to the acquisition of assets in the Phelps purchase. Freeport and other miners like Rio Tinto (NYSE:RTP), BHP Billiton (NYSE:BHP) may be struggling now, but commodity prices will eventually return, and Freeport's loss will be a thing of the past.

Let us know what you think by making an out- or underperform call on these companies at the Motley Fool CAPS. While you're there, post a pitch about whether you think GAAP earnings are all they're cracked up to be. It's free. It's fun. And, it's Foolish.

NVIDIA is an active Stock Advisor pick. Click here to start a 30-day risk-free trial of the newsletter and see all the current Garner brothers' recommendations.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy is never at a loss for words.