Earnings drive stock prices, and a great way to measure the value of a stock is by studying its P/E ratio. Finding companies with a low P/E is an often used strategy in seeking undervalued stocks. While the past two years have reduced undervalued stocks to a trickle, there are still low P/E stocks with signs of future growth ahead.

TUTORIAL: Stock Basics

Sitting in Plain Sight
Large cap Archer Daniels Midland (NYSE:ADM) is a well-known agricultural company sitting in plain sight with a P/E around nine. ADM is one of the largest transporters and processors of oilseeds and grains. Despite the bullishness in the ag sector today, ADM has not been a participant. ADM also has an extensive network of grain storage facilities all over the world. The company is expected to earn $3.31 a share in 2011, and $3.37 in 2012. If agricultural commodity prices remain robust, 2012 estimates could prove conservative. (For related reading, see How To Evaluate The Quality Of EPS.)

If estimates prove conservative, then investors may also want to look at rival Bunge (NYSE:BG), which currently trades at 4.4-times earnings. Bunge is a global food and fertilizer company. Most other names related to agriculture including equipment company AGCO (Nasdaq:AGCO) and fertilizer play Agrium (NYSE:AGU) trade at significantly higher multiples.

Out of the Spotlight
Electronics component supplier Avnet (NYSE:AVT) is not a name that is on the mind of most investors. Business is going well for Avnet. Computer component sales are robust as the hardware cycle is currently being upgraded. Growth in Asia should also benefit the top and bottom line over the years. Avnet shares trade for $30, with 2011 earnings per share of $4.26 and 2012 EPS coming in at nearly 7% higher at $4.55 a share. At the current share price, the company is trading for less than seven-times forward earnings.

The Bottom Line
With the S&P 500 trading at over 15-times earnings, and stocks favored by investors trading at significantly higher multiples, profitable low P/E stocks deserve a closer look. A low P/E can also signal a value trap, and is not a metric to anchor an entire investment decision. Stocks gain value according to the amount of future earnings that a company can earn, and a low P/E is not necessarily a predictor of future earnings growth. (For more, see The P/E Ratio: A Good Market-Timing Indicator.)

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

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center