Bargain hunters prowl for stocks
— -- With stocks struggling this year, most investors want to cry about the money they've lost. But others are seeking bargains.
One of the most closely watched measures of stock value, the price-earnings ratio, is below levels hit at the bottom of the last bear market, and specific stocks have far lower valuations.
A P-E shows how much investors are willing to pay for each $1 a company earns, so in theory, the lower a P-E, the better a buy a stock should be. Investors need to go back a long time to "find a market, on a valuation basis, that is as compelling as it is today," says David Sowerby of Loomis Sayles.
The Standard & Poor's 500 index trades at 24.7 times earnings reported for the most recent 12 months, S&P says. That is below the 27.1 P-E when the last bear market bottomed in September 2002, which suggests to bulls that the market could be a better buy now than it was then.
When it comes to individual stocks, an extremely low P-E can also indicate Wall Street has questions. Consider these S&P 500 stocks with a P-E of 8 or less:
•Telecom. Telecom investors have plenty to worry about with cable companies muscling into the phone business. That's reflected in telecom firm Qwest's q P-E of 2.5, S&P's Capital IQ says.
Some investors measure Qwest's valuation differently, but the risks are clear, says Sergey Dluzhevskiy, stock analyst at Gabelli. Qwest has lost some residential phone customers who switched to cable companies or who rely entirely on their cellphones, he says. Qwest also does not own or have a large stake in a wireless carrier, unlike Verizon vz and AT&T, t he says.
Dluzhevskiy thinks these issues may linger, but he says Qwest has been effective in limiting revenue loss by catering to business customers and maintaining profits with lower costs.
•Financials. Five of the 19 stocks in the S&P 500 with P-Es of 8 or less are banks or brokerages, such as Regions Financial, rf Travelers trv and Goldman Sachs, gs according to data from Capital IQ.
These stocks can turn quickly. Regions jumped $1.78, or 19%, to $11.05 Tuesday after taking more than $900 million in deposits from a Georgia bank that regulators closed last week. It was seen as a vote of confidence for Regions and "lets people know regulators are not that concerned about Regions," says Scott Valentin of Friedman Billings Ramsey. Valentin, though, still rates Regions a "sell," because he worries the credit crisis isn't past yet.
Another thing to consider when focusing on P-Es is that there is disagreement on how to calculate them. Some investors look at future estimated earnings, while others look at what has already been earned.
Sometimes there is even a question on which earnings to use to fairly value a company. For instance, tobacco-maker Altria mo has a 4.9 P-E on its past 12 months of earnings, according to Capital IQ. But that's artificially depressed because Altria spun off large parts of its business the past year, says Christopher Growe of Stifel Nicolaus, who places the P-E at 13.5.
But Sowerby says investors will be rewarded for paying attention to P-Es. "In value terms, the market offers a very compelling risk and return trade-off."