Study after study has shown that stocks with low price-to-earnings multiples significantly outperform high P/E stocks. Research from my favorite investing guru, NYU professor Aswath Damodaran, pegged the outperformance at anywhere from 9% to 12% per year, depending on the study period. That's big money we're talking about.

But you already know that you can't just go out and buy the stocks with the lowest multiples. Companies can trade at dirt cheap prices for a number of dire reasons, including low growth prospects, skepticism about earnings, or high risk of filing for bankruptcy protection.

These dangerous stocks can quickly crater. Buy too many of them, and you'll increase your own risk of bankruptcy.

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."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thing
We're looking for companies with low price-to-earnings multiples, but also a relatively low amount of risk, and the potential for reasonable growth. Our screen today will cover the best value plays in the "retailing" sector, as defined by my Capital IQ screening software.

There are 89 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 17.5. Here are my parameters:

  1. To stay away from bankruptcy risk, I used Damodaran's suggestion and only considered companies with total debt less than 60% of capital.
  2. In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates, and kept only companies expected to grow EPS at 5% annually or better over the next five years. Furthermore, I required at least 5% annualized growth over the past five years.

Only 24 companies passed the screen. Here are the 15 with the lowest forward price-to-earnings multiples:

Company

Market Cap
(in millions)

Forward P/E

Debt-to-Capital

Estimated EPS
Growth

GameStop (NYSE: GME)

$2,966

7.4

14%

10%

Rent-A-Center (Nasdaq: RCII)

$1,342

7.5

32%

8%

Collective Brands (NYSE: PSS)

$904

7.8

48%

13%

Best Buy (NYSE: BBY)

$13,817

9.7

16%

13%

Dress Barn (Nasdaq: DBRN)

$1,755

10.2

3%

12%

Dillard's (NYSE: DDS)

$1,361

10.6

31%

6%

Ross Stores (Nasdaq: ROST)

$5,986

11.7

11%

15%

Aaron's (NYSE: AAN)

$1,362

12.0

5%

12%

Kohl's (NYSE: KSS)

$13,853

12.1

20%

14%

The TJX Companies (NYSE: TJX)

$16,686

12.3

21%

14%

Dollar Tree (Nasdaq: DLTR)

$5,385

14.2

17%

15%

Advance Auto Parts (NYSE: AAP)

$4,743

14.4

25%

11%

Family Dollar Stores (NYSE: FDO)

$5,693

14.9

15%

14%

PetSmart (Nasdaq: PETM)

$3,504

15.4

34%

13%

O'Reilly Automotive (Nasdaq: ORLY)

$6,500

16.4

17%

18%

Source: Capital IQ, a division of Standard & Poor's.

There are lots of good research candidates here -- I expanded the list to 15 to help you find more companies you might be interested in. To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas less than one.

What about companies in different sectors? I'll be running more screens over the coming days, so be sure to check back in this space.

Fool analyst Rex Moore is just back from vacation, and needs a vacation. He owns no companies mentioned in this article. Best Buy is a Motley Fool Inside Value recommendation. Best Buy and PetSmart are Motley Fool Stock Advisor selections. The Fool owns shares of Best Buy, and GameStop. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.