3 Value Plays Revealed Using Forward P/E

By Chris Seabury | October 13, 2008 AAA

The forward P/E ratio gives you the ability to find long term values based upon next year's projected earnings. To calculate the forward P/E ratio you divide the price of the stock by the projected annual earnings per share.

Because it is projected, multiples will vary according to the estimates used. By using this you can calculate the markets valuation of a particular stock. It would be safe to generally say that stocks with forward P/E ratios of 25 or above are usually under pressure to have considerably better than expected earnings or they will risk being sold off. Conversely, when a company has a low forward multiple there might have been a severe sell off in the stock and it could be an attractive long term buy for the patient investor. (To learn the basics of P/E valuation, check out our P/E Ratio Tutorial.)

Below are three stocks that have attractive forward P/E ratios. The key to any good investment is to get in early, and as the markets recognize their valuations they will start to trade higher, giving you a nice profit over the long term.

Company Forward P/E Market Cap
Conoco Phillips
(NYSE:COP)
8.70 76.45B
Goldman Sachs
(NYSE:GS)
10.02 41.38B
Travelers Companies
(NYSE:TRV)
9.12 20.65B
Data according to Google Finance as of Oct. 13, 2008.


Conoco Phillips Attractive at Current Levels
With oil production and refining continuing to increase, Conoco Phillips is an excellent candidate for long term growth and sound fundamentals. The major integrated oil company has had a sell off of 37.20% over the last year. Even with oil prices pulling back, the shares still look very attractive with a forward P/E of 8.70. According to Thomson First Call, analysts are divided on the stock with seven rating it a 'buy' or 'strong buy'; seven others have the company rated as an 'underperform' or 'hold'. With Wall Street unsure about the where the stock is headed there is the potential for upward momentum and better than expected earnings surprises. (To learn more, read Surprising Earnings Results.)

Goldman Sachs has Potential
Goldman Sachs has been hit hard by unfounded rumors and fear. The recent market turmoil has caused many investors to dump the strong companies along with the weak. While shares are down 45.73% over the past 52 weeks, the company is trading at very attractive valuations. It has a forward P/E ratio of 10. The investment bank has held up relatively well in comparison with other major Wall Street firms. In fact, Warren Buffett's Berkshire Hathaway made a $5 billion investment in the company. What does all of this mean? Despite the concerns surrounding the credit markets, Goldman appears to be one of the strongest among the major firms. While the current situation will take time to work through, over the long run the company is in solid financial shape with $939.18 billion in cash and $422.05 billion in debt. (For more information about debt ratios, check out Debt Reckoning.)

Travelers Companies' Compelling Valuation
Like many insurance companies, Travelers Companies has been placed into the same category as AIG (NYSE:AIG). While many try to draw the same comparisons, it is completely false to assume Travelers is an AIG clone. The recent selloff has created an excellent long-term entry point with the stock trading at forward P/E ratio of just over 9. The company is on solid financial footing with $5.86 billion in cash and $6.34 billion in debt. Despite all the doom and gloom, it has continued to be beat earnings estimates for the past four quarters.

Conclusion
This is a very unique time for the markets from a valuation standpoint. While many are fearful of what is happening there are many strong companies out there that have been brought down with the overall the markets. This allows long term investors to take advantage great companies with low forward P/E ratios. By taking a long term focus and buying strong companies with low forward P/E ratios it is only a matter of time until the markets discover these valuations and the patient, long term investor is rewarded handsomely.

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