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Tickers in this Article: GPS, PCZ, EBAY, HPQ, AEO, ARO, TGT, WMT, CI
It's useful to investigate a number of metrics prior to making any investment decision. I often take a look at price-to-book value, price-to-cash flow and price-to-sales. However, like many other retail and institutional investors, I tend to place a great deal of emphasis on the price-to-earnings ratio (P/E). I try to isolate companies that have both a low P/E and the potential to grow earnings at a healthy pace.

With this criteria in mind, I recently screened for companies that enjoy a trailing 12-month P/E of less than 10, and that are expected to grow their earnings from 2009 to 2010 (or in the current year to the next). This will provide a good point of departure for further research, so let's take a look.

Company Market Cap P/E (TTM)
Cigna Corp (NYSE:CI) .8 billion 16.9
Ebay (Nasdaq:EBAY) .8 billion 10.3
Gap (NYSE:GPS) .3 billion 10.5
Hewlett Packard (NYSE:HPQ) .2 billion 10.5
Petro-Canada (USA) (NYSE:PCZ) billion 5.5
As of April 6, 2009.

Retail Bargains
At this point, the retail market may not seem like the most stable investment. At the same time, however, there are some companies in this space that appear to be pretty cheap and therefore hard to ignore. (Learn more in Analyzing Retial Stocks.)

Take Gap for example. The California-based retailer trades at around 10 times earnings. It is also expected to earn $1.07 a share in the current year and a $1.15 a share the next year. If it hits those estimates, I think there is a good chance the stock could end up moving higher.

Before buying into these stocks, however, investors must strongly consider whether they believe that Gap will hit its estimates. At the current time, the available data gives me mixed feelings.

The Good and the Bad
On the plus side, Gap has a strong company name and vast retail footprint. There is also the dividend, and the forward yield is about 2.5%. And don't forget about its history. Although it can't quite trace its roots back as far as say JCPenney (NYSE:JCP), it has been around since 1969 and has undoubtedly had to weather some tough times. JCPenney has a P/E of around 8.5 and a dividend yielding around 3.5%.

On the downside, it is important to note that the competition in apparel remains stiff. With the current economic conditions, I think that some will continue to turn to discounters like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). I also think that other well-known apparel companies like Abercrombie (NYSE:ANF) and American Eagle (NYSE:AEO) will be fighting for foot traffic, and that that too could stymie progress.

In February, Gap's comp store sales at Gap North America were off 12%. Meanwhile, its Banana Republic North America comps were off 16%, and its Old Navy North American comps were down 13%. (Read how to use these numbers to in Using Consumer Spending As A Market Indicator.)

Promising Prospects
There are other companies in apparel that seem to sport a reasonable trailing 12-month P/E. Abercrombie, for instance, has a trailing 12-month P/E around 8, and American Eagle's is 14.5. As well, American Eagle is expected to grow more than 12% per annum in the next five years. Then there is Aeropostale (NYSE:ARO), which has TTM P/E just shy of 12, and is expected to grow more than 14% per annum in the next five years.

Bottom Line
A P/E is a metric that generally shouldn't be overlooked. That said, it is just one of many tools that investors have at their disposal, so investors should use it in conjunction with other tools before making a decision.

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