The price-to-earnings (P/E) ratio is one of the most widely used valuation measures in the stock market. The ratio is relatively easy to calculate and tells investors what the market is willing to pay for every $1 of a company's earnings. The P/E ratio has also been proved to have a significant relationship with long-term stock returns, so despite its simplicity, it is a great starting point for starting stock analysis. (To learn more, check out our P/E Ratio Tutorial.)
P/Es of comparable companies should generally be the same, unless company-specific factors change the outlook of the company considerably. That means if there are comparable companies, and one is trading at a lower P/E, it may be relatively undervalued. This is a great way to find bargains in the market.
Let's take a look at five stocks with low P/Es worthy of follow-up research. If we research these stocks and buy them when their P/E multiples are below their peers' we have a chance to earn a nice return if the market starts valuing these stocks higher:
|
Company
|
Trailing P/E
|
Market Cap (Millions)
|
|
Autoliv
(NYSE:ALV)
|
9.09
|
$2,985.3
|
|
Boyd Gaming
(NYSE:BYD)
|
9.6 |
$1,229.8
|
|
Nutrisystem
(Nasdaq:NTRI)
|
9.35 |
$599.6 |
|
Officemax
(NYSE:OMX)
|
6.33
|
$1,067.4
|
|
Oshkosh
(NYSE:OSK)
|
4.44
|
$1,256.4
|
|
Data as of market close August 11, 2008
|
Nutrisystem's Healthy Q2
As the number of Americans battling the bulge grows, companies that cater to weight management should become increasingly popular. And among my favorite companies in this business is Nutrisystem. Nutrisystem has 35 years of history behind its products, and reputation is important in a business fraught with fly-by-night artists and fad diets.
Of course, it's important that the business itself is healthy too, and Nutrisystem fits the bill. In its second quarter, ended June 30, Nutrisystem's bottom line came in at almost $22 million, or 71 cents a share. True, that was lower than the bottom line it generated in the same period in the prior year, but this was still far ahead of analyst expectations of 65 cents per share.
Another healthy sign is that Nutrisystem is currently expected to earn $1.99 per share this year, and $2.27 per share next year which certainly catches my eye given that the stock can be had for about $20 and change. The shares also sport a dividend, with a current yield of 3.9%.
Downside Risks
Insider data suggests that insiders haven't been aggressively buying the stock in the open market. This is always a bit of a concern. Another issue is that the shares are well off their 52-week high, which leads me to think that tax loss selling season could be rough. (To learn more, read Delving Into Insider Investments.)
Conclusion
Buying a stock when its P/E is depressed can provide big payoffs to patient investors. The important thing to do is determine if the characteristics of the company are comparable to its peers and industry. The P/E is often lower because the stock simply does not have the same earnings potential. However, there are many cases where the market sours on a stock in the short term and drives down its P/E. Finding those undervalued gems can help boost portfolio returns.
What do you think of these low P/E stocks? Join the FREE Stock Picking Community to share your thoughts and see what other investors are saying.
