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:
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: