Generally speaking, investors should ponder several metrics before making an investment decision. Cash flow and leverage ratios are usually worth a look. In addition, the price/earnings ratio (P/E) can be an invaluable tool in helping to identify potentially undervalued situations. I like using the ratio because it's easy to understand and calculate, and because P/Es can be used to evaluate a wide cross section of stocks. (To learn more about this valuable ratio, check out the Price/Earnings Ratio section of our Investment Valuation Ratios Tutorial.)
Of course, just because a company has a low P/E doesn't mean that its stock will take off. In fact, some companies sport low P/E ratios for a reason. Perhaps future growth is in question or the market sees something else it doesn't like. That is why I consider the ratio just one of many tools the investor might use.
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With that in mind, I screened for stocks that have a trailing 12-month P/E of less than 10. Some of these companies may be worth a closer look.
|Company||Market Capitalization||P/E Ratio (TTM)|
|Archer Daniels Midland
|Deere & Co.
|Tiffany & Co.
|Data as of market close February 20, 2009 from the Investopedia Stock Screener.|
Today, Let's Touch On Tiffany, Shall We?
The jewelry business isn't exactly sparkling these days. Steep discounts being advertised in circulars around the country and the bankruptcy filing of one-time stalwart Whitehall Jewelers serve as evidence of that.
The business is also very competitive, with large and reputable firms such as Zale (NYSE:ZLC), and major department stores that sell jewelry such as Macy's (NYSE:M), fighting for business.
However, if one player in the business stands out, it's Tiffany & Co. Why? To be clear, the company is feeling a pinch due to the slowing economy. Its holiday sales numbers were a perfect example of that. Per the sales release, "In the Americas, sales of $385.9 million in the holiday period were 30% lower than a year ago."
However, many people don't understand that the company also has a great deal of international exposure. Asia Pacific sales accounted for more than 30% of total sales in Q3. Tiffany's has a fairly sizable exposure to the European continent as well. That may help mitigate some of the regional risk.
In spite of the economic environment here in the U.S., the company is still expected to earn $1.90 a share in the year ending January 2010, according to data on Yahoo Finance. That's pretty sweet given that the shares can currently be had for under $20. Frankly, I'm wondering how strong earnings might be if the domestic economy were to mount a comeback.
Finally, the following comments regarding share repurchases caught my attention within the Q3 release: "The company repurchased and retired 2,269,225 shares of its common stock in the third quarter at a total cost of $89.9 million, or $39.61 per share. Purchases were temporarily suspended in the latter part of the quarter to conserve cash." (Read A Breakdown Of Stock Buybacks to learn more about the value of these company programs.)
The suspension doesn't surprise me. In this environment, that's actually good management to save money. However, the fact that it was willing to buy its shares in a difficult environment was a sign that it thought they were a good value.
Companies that sport a low P/E ratio aren't necessarily a bargain. However, such companies can be a starting point for further research.