Wall Street begins to hear 'buy stocks' rumblings

NEW YORK -- Are stocks finally selling at bargain prices?

The plunge on Wall Street has sliced the value of stocks in half since the 2007 peak. That's prompting debate on whether stocks — now appearing to sell at a red-tag-sale prices — are at a safe entry point.

President Obama, who is moving to boost investor confidence, weighed in on this topic Tuesday, noting that stocks have become a lot cheaper relative to earnings. He said it is "starting to get to the point where buying stocks is potentially a good deal if you've got a long-term perspective."

While Obama's remarks didn't have any apparent immediate effect, on Wednesday, the Dow Jones industrials rebounded 150 points to 6876, ending a five-session skid.

Market gurus agree that on a historical basis, stocks are getting down to levels that could be described as cheap. Using a common valuation that compares stock prices to profits, known as the price-earnings ratio (P-E), companies in the Standard & Poor's 500 now trade at 10 times profit earned the past 12 months. That is the lowest in 20 years, S&P data show.

Data from InvesTech Research show how the current P-E of 10 compares with valuations at other bear market bottoms:

•It hit 7 at the trough of the 1973-74 bear.

•The P-E also went to the midsingle digits — 7.7 — at the end of the 1982 downturn.

•After the 1987 crash, the P-E hit 12.8. At the low of the 2000-2002 bear, it hovered around 30.

Is the stock market as cheap as it's going to get? Experts stress that there are limits to using P-Es as a single tool to pick bottoms.

"Valuation by itself is not a great timing tool," says Jack Ablin, chief investment officer at Harris Private Bank. Still, he says the S&P 500 is as cheap vis-à-vis the economy as it has been since 1985 and that now is a good entry point for "patient investors."

James Stack, president of InvesTech Research, says that while historical P-Es offer a "rough guide" to answer "how low is low," he notes that P-Es can be distorted during severe recessions, because future profits may come in far lower than investors believe. If that occurs, stocks that now appear cheap may be more expensive than they seem. "Do you want to look at earnings before we fell off a cliff or ones looking forward?" he says.