Low P/E Stocks In Every Sector

Stock picking involves detailed analysis of the micro and macroeconomic variables that determine the fundamentals of the company. While an investment decision cannot be based solely on a single multiple, the price-to-earnings ratio is an ideal place to start. After identifying those companies which trade at low multiples, not only on a stand alone basis but also when compared to their industry and even the broader market, those shares may present an optimal investment opportunity. A low P/E might arise due to substantial inherent risk of the firm and its operations, poor return on equity, or improper valuation of the market. The stocks which fall into the third criteria are those which can provide profitable investment opportunities.

IN PICTURES: 5 Keys To Unlocking A Better Credit Score

Financial
Financial firms typically trade with a price-to-earnings that is somewhat lower than that of the overall market. Currently, corporations in the financial sector trade with a multiple of 12.12, while the S&P500 has an average ratio of 20.34. Discover Financial (NYSE:DFS) trades with a multiple of 7.65, which is significantly below that if the sector and industry. With a return on assets and return on equity higher than that of its peers, the 12 buy and outperform ratings suggested by analysts, out of the 19 polls by Reuters may be justified.

Utility
Investors seeking to add dividends to their portfolio often turn to the utility sector to obtain the desired regular income. As the market continues to tumble this month, numerous utility corporations are yielding over 5%. Although the increased dividend yields in downward markets are inflated, utility firms generally have dividend policies which are more consistent than those found in other economic sectors. Exelon Corporation (NYSE:EXC) not only pays a 5.60% dividend yield but also trades at a low P/E multiple of 9.35. Exelon has a great deal of financial strength with has a quick ratio of and current ratio of 1.16 and 1.31 respectively will ensure that current liabilities will not hinder near term performance. Long-term coverage ratios are also solid.

Healthcare
In addition to financials, many opportunities exist to find health care stocks which trade at low earnings multiples. One of the lowest ratios in the sector, 8.44, belongs to United Health Group (NYSE:UNH), a provider of health services in the United States. Fundamentally, this firm is trading at low multiples in terms of sales, book value, cash flow and free cash flow. With further research, it might prove to be a strong pick.

Services
GameStop Corporation (NYSE:GME) sells new and used video game software, hardware and accessories. Of the 17 analysts polled, 10 suggest a buy rating on the stocks. The firm trades at higher price-to-earnings, price-to-cash flows, price-to-sales and price-to-tangible book values compared to many of its competitors. Before dismissing GameStop, further research must be conducted whether these multiples are justified. Analysts seem to think so.

Within the service sector, newspaper providers tend to trade at higher multiples. The overall service sector carries a beta of 0.99, moving almost in tandem with the market, but companies such as Gannett (NYSE:GCI), which publishes newspapers and magazines, operate with an average beta of 1.36. GCI specifically, trades with a beta of 2.68 which influences the low 9.04 P/E ratio of the firm. While Gannett may increase in price, when judged by ratio analysis, investors should take note of the higher risk of the company.

The Bottom Line
Price multiples can reveal a great deal of information about the fundamental value of a company. However, these fundamental metrics must be analyzed with historic data, industry information in addition to firm specific financial statements. For example, only after observing the 14.13 P/E of the technology sector, can we say that companies such as Western Digital (NYSE:WDC) which trades with a multiple of 5.59 might be undervalued. Yet, to find out the reason behind the low P/E, more research must be done. (Take a look at how this effective ratio can be influenced by certain critical factors. For further reading, check out Use The Price-To-Sales Ratios To Value Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!