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.
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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.)
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