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 what my Capital IQ screener calls the "Semiconductors and Semiconductor Equipment" industry.

There are 92 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 11.9. 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.

Of the 15 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

Micron Technology (Nasdaq: MU)

$6,691

3.9

20%

7%

Lam Research (Nasdaq: LRCX)

$4,570

7.0

1%

25%

Varian Semiconductor Equipment Associates (Nasdaq: VSEA)

$1,893

8.0

0%

25%

Diodes (Nasdaq: DIOD)

$648

9.0

22%

18%

Intel (Nasdaq: INTC)

$101,004

9.2

5%

10%

Xilinx (Nasdaq: XLNX)

$6,385

10.0

31%

13%

Marvell Technology Group (Nasdaq: MRVL)

$10,557

10.2

0%

17%

Analog Devices (NYSE: ADI)

$8,496

11.0

12%

14%

Altera (Nasdaq: ALTR)

$7,866

11.3

24%

16%

Micrel (Nasdaq: MCRL)

$579

11.5

3%

25%

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.

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

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool analyst Rex Moore welcomes you to this disclosure novella. He owns no companies mentioned here. The Fool owns shares of and has written puts on Intel, which is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Marvell Technology Group. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.