When in doubt about which stocks to buy (in particular, value stocks), it is logical to go for the ones with P/E lower than its peers. The P/E ratio is a snapshot of a firm's earnings strength and thus investing in low P/E stocks can prove to be a good bargain for investors.
Choose Safety Over Growth
The curtain call at the end of the third-quarter earnings season may not win applause from investors. Volatility clearly stole the show, leading to poor earnings and revenue performance. As of Nov 11, 2015, 455 S&P 500 members had released results. Notably, total earnings for these 455 companies deteriorated 2.5% on a 4.1% decline in revenues, with 68.6% beating EPS estimates and only 42.1% beating top-line expectations. (Read more: Q3 Earnings Scorecard )
With familiar fears of a rate hike, weak global growth and the slump in oil continuing to stalk markets, volatility is expected to loom for the near term.
Thus, keeping in mind the current economic fundamentals, it might not be a bad idea for investors to play it safe at the moment. Stocks with low P/E tend to trade at a price below their fundamentals, thus keeping the window open for price appreciation. In addition, these are less prone to day-to-day fluctuations and are much safer bets in a volatile market.
But how do we steer through the arguably overpriced market and find stocks that are trading at cheap valuations?
Zacks to the Rescue
The only glitch in this old school of investing is that P/E ratio barely conveys a company's future earnings growth. Thus, investors can easily fall victim to a value trap if the P/E ratio of a stock is low for a compelling reason such as weak fundamentals.
Therefore, it is vital to take the company's growth prospects into report before taking the lunge with merely low value stocks as lifeguards. An analysis of the company's growth potential to make sure that a particular company has bright prospects along with a low P/E ratio promises more returns.
Thus, with the help of the Zacks Stock Screener , we have zeroed-in on five stocks that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy), and trade at a Price/Earnings (F1) ratio of less than 10. Further, their prospects serve as a perfect opportunity for investors to jump in and ride the anticipated growth.
5 Stocks for Grabs
Huaneng Power International, Inc.HNP is an independent producer, generator and seller of power in China. The country is the world's largest producer as well as importer of coal. Pessimism over China's economy has been prevailing for some time now. However, fresh indicators suggest that the economy may soon be firming, and thus investing in this Zacks Rank #1 company headquartered in Beijing may be a good choice.
P/E: 5.96 (versus 16.65 for the industry)
Change in Full-Year Estimate Revision (over 60 days): 10.2%
This year's expected EPS growth rate: 41.1%
Danaos CorporationDAC is a leading international provider of containerships, chartering vessels to many of the world's largest liner companies. Going forward, we expect Danaos' efforts to de-lever its balance sheet, efficient management of its fleet and relentless focus to capitalize on the strength of its business model to consistently boost this Zacks Rank #2 company's earnings potential and capital position.
P/E: 4.47 (versus 9.19 for the industry)
Change in Full-Year Estimate Revision (over 60 days): 4.7%
This year's expected EPS growth rate: 145.5%
San Antonio, TX-based Tesoro CorporationTSO is one of the largest independent refiners and marketers of petroleum products in the U.S. A major advantage for this Zacks Rank #2 company is the scale and diversification benefits offered by its portfolio of six refineries. Moreover, being buyers of crude, Tesoro's profitability has been favorably impacted by a fall in the input cost. With oil prices anticipated to remain weak throughout 2015, future prospects look bright for the refiner.
P/E: 8.39 (versus 12.03 for the industry)
Change in Full-Year Estimate Revision (over 60 days): 16.5%
This year's expected EPS growth rate: 105.5%
Detroit, MI-based General Motors CompanyGM is engaged in the designing, manufacturing and retailing of vehicles globally. The company has adopted a comprehensive capital allocation strategy, which reflects its strong operating performance and robust financial position. Further, this Zacks Rank #2 company is positioned to benefit from its investments in the U.S., directed toward strengthening its operations and new product launches and contacts which will help in business expansion.
P/E: 7.45 (versus 11.17 for the industry)
Change in Full-Year Estimate Revision (over 60 days): 5.3%
This year's expected EPS growth rate: 56.8%
Marathon Petroleum CorporationMPC is a leading independent refiner with proprietary access to pipelines that inhibit lower-cost competitors from supplying its key markets. With crude prices remaining weak, this Zacks Rank #2 company is likely to continue benefiting from improved margins. Moreover, the recent proposed MPLX-MarkWest merger should increase Marathon Petroleum's cash flow position and hence, support growth.
P/E: 9.21 (versus 12.03 for the industry)
Change in Full-Year Estimate Revision (over 60 days): 6.4%
This year's expected EPS growth rate: 37.2%
Spot the Opportunity
When the stock market is as tumultuous as this, it is foolhardy to blindly follow the fads. Instead, spot the opportunities that market ups and downs offer through stocks with strong fundamentals and cheap valuations.
As they say, no one ever made a dime panicking. So just buckle up and enjoy the market's rollercoaster ride!
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
TESORO CORP (TSO): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
DANAOS CORP (DAC): Free Stock Analysis Report
HUANENG POWER (HNP): Free Stock Analysis Report
MARATHON PETROL (MPC): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
