In the investing world, a company’s earnings are one of the most powerful predictors of its stock price. Aside from high-priced tech players like LinkedIn and Facebook, an easy way to determine if one should invest in most types of stocks can be done by looking at earnings multiples. The most commonly used of these metrics is the Price-to-Earnings ratio, which simply states the “multiple” that investors are willing to pay for every dollar of that company’s earnings.
In most cases, companies trading below their historical average P/E’s are solid value plays, while those with above-average earnings multiples are best left to your less prepared peers. Without further ado, here’s a quick look at some of the market’s cheapest companies according to P/E ratios. While it is never a good idea to take blind faith in all stocks that meet this sort of criteria, the following analysis can provide a starting point for your own individual research.
Wells Fargo & Co (NYSE: WFC)
In 2012 thus far, Wells Fargo has generated a splendid return of 27.0%, outpacing the financial services sector (15.1%), and competitors like JP Morgan Chase (NYSE: JPM) at 18.2%, and Citigroup (NYSE: C) at 21.9%. Despite this advantage, Wells Fargo is actually trading at a paltry P/E ratio of 11.6X, below both the industry average (12.8X), and the stock’s own 5-year (18.8X) and 10-year (16.8X) historical averages. With a 5-year forecasted EPS growth (9.0%) more than four times Wells Fargo’s average over the past half-decade (2.7%), it’s hard to understand why the markets aren’t valuing the banking giant at its full worth.
The Street is forecasting yearly earnings of $3.32 by the end of 2012, and if Wells Fargo hits this mark, fairly valued shares of WFC can eclipse $60 by next summer. The stock currently trades in the $35 range, making a one-year appreciation of more than 70% a real possibility. WealthLift’s Sentiment Index rates Wells Fargo as a strong buy, with 85.71% of the community’s investors placing an “overperform” rating on the stock.
ConocoPhillips (NYSE: COP)
As mentioned in this article, ConocoPhillips spun off Phillips 66 (NYSE: PSX), its downstream oil business, into a separate entity earlier this year. In the time since this move, shares of COP have remained relatively flat, as a general economic malaise has sheathed the company with lower than normal oil prices and the ever-present Eurozone fears. Fortunately for value investors, this macro-created stagnancy has presented a buying opportunity.
The company currently trades at a P/E ratio of 6.6X, below its industry’s average (9.4X), and competitors like Apache Corp. (NYSE: APA) at 11.1X, and Marathon Oil (NYSE: MRO) at 11.5X. Moreover, ConocoPhillips’ earnings are also trading below their 5-year (8.1X) and 10-year (10.4X) historical averages. In fact, over the past half-decade, they’ve traditionally traded at a 38% discount to those of the S&P 500. This year, they are much cheaper, trading at a 56% discount.
Now, the bears will cry that muted EPS growth is on the horizon, as 2013 analyst estimates only predict bottom line expansion in the 1-2% range, but the bottom line is this: even if ConocoPhillips’ earnings remained stagnant over the next 12 months, fairly valued shares would flirt with $60.
Seeing as they currently trade in the $56 range, any potential appreciation wouldn’t be earth shattering, but still useful to anyone’s portfolio. WealthLift’s Sentiment Index seems to agree, as the community’s users are rating ConocoPhillips as a strong buy, with a positive rating of 89.47%.
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Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.