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 energy sector, as defined by my Capital IQ screening software.

There are 267 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 26.4. 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 grow th, 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.

Of the 42 companies passing the screen, here are the 10 with the lowest forward price-to-earnings multiples:

Company

Market Cap
(in Millions)

Forward P/E

Debt to Capital

Estimated EPS
Growth

China Petroleum & Chemical (NYSE: SNP)

$108,062

7.4

34%

20%

Atwood Oceanics (NYSE: ATW)

$2,943

11.0

17%

11%

RPC (NYSE: RES)

$2,913

11.2

18%

19%

Repsol YPF SA

$41,028

11.5

46%

26%

Sasol (NYSE: SSL)

$32,774

11.6

14%

21%

Alpha Natural Resources (NYSE: ANR)

$6,507

11.8

23%

10%

CNOOC

$100,928

12.1

6%

13%

Diamond Offshore Drilling (NYSE: DO)

$10,978

12.9

28%

18%

Hess

$28,537

13.2

25%

12%

Arch Coal (NYSE: ACI)

$5,566

13.4

42%

9%

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

There are lots of good research candidates here. 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.

Finally, feel free to add any of these companies to your own personal watchlist!

Fool analyst Rex Moore has an oily patch, tweets around, and owns no shares mentioned here. Atwood Oceanics is a Motley Fool Stock Advisor selection. CNOOC is a Motley Fool Global Gains recommendation. Sasol is a Motley Fool Income Investor pick. The Fool owns shares of Diamond Offshore Drilling. 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.