What are we looking for?
With the equity markets in rally mode, finding attractively priced stocks is getting harder. Yesterday we looked at some Canadian stocks that are trading at low price-to-earnings multiples and which have predictable earnings and positive price momentum. Today we'll turn our attention to the U.S. market.
'Valuation laggards'
Myles Zyblock, chief institutional strategist and director of capital markets research at RBC Dominion Securities, said now is a good time to look for "valuation laggards." Specifically, he screened for stocks "possessing an attractive combination of relatively low price-to-earnings, price-to-forward earnings and price-to-book ratios."
The price-to-earnings ratio is the stock price divided by per share earnings over the previous 12 months. For example, a stock that trades at $20 and which earned $2 a share in the past year has a P/E of $20/$2 or 10. The lower the P/E, the less the investor has to pay for the company's earnings. While low P/E stocks are attractive from a valuation standpoint, an investor has to be careful because a low P/E can also be associated with slow growth or financial problems.
The forward price-to-earnings ratio is similar, expect that it measures the stock price divided by estimated earnings per share over the next 12 months, as projected by analysts. Finally, the price-to-book ratio measures the price of the stock divided by the book value, or shareholders' equity, per share of the company. The lower the price-to-book ratio, the less the investor is paying for a dollar of shareholders' equity.
"Our primary stock selection strategy has been focused on quality growth with income," Mr. Zyblock said in a note. "However, we think this is an opportune time to also add some valuation laggards given the strength of the run we have seen in the market over the past couple of months."
What did we find?
As you can see from the chart, despite the market's advance, some well-known stocks such as Hewlett-Packard Co., Chevron Corp. and Corning Inc. were still trading at a forward P/E of less than 10 when the screen was performed on Oct. 31. Use the screen as a starting point for further research, and be sure to check whether the company's circumstances have changed since then.
"We believe this table offers a decent starting point for those struggling to find value, or those looking for fresh money ideas," Mr. Zyblock said.
John Heinzl