Wednesday, June 10, 2009

WSJ -- Single-Digit P/E Ratios

Low price/earnings ratios are usually easy to find, even when the broad market seems expensive. For example, the S&P 500-stock index has climbed more than 30% in three months and now trades at 22 times trailing earnings, well above stocks' 137-year average trailing P/E of 15. Still, one out of every eight index members has a P/E in single digits.

Not all low-P/E stocks are bargains, though. Modest valuations often mean earnings are expected to decline, and some declines suggest long-term decay. Others are simply temporary swings in consumer spending or raw materials prices. Shares of companies that trade cheaply because of expected, temporary earnings stumbles might be just the thing for investors worried that the broad market is priced for disappointment. For the humbly priced stocks to follow, a certain amount of anticipated disappointment is already priced in.

Chevron's earnings are expected to plunge this year but rebound sharply next year. My sympathies to the analysts who must come up with forecasts. Last summer, crude peaked at more than $145 a barrel. Just before Christmas, it fell below $35. Now it is over $70 again. Better, perhaps, to focus on the dividend yield, which stands at 3.7%, compared with about 2.3% for the broad market.

Carnival seems perfectly emblematic of the sort of pricey frolicking the middle class can do without during a recession. The stock is accordingly about half its price of two years ago. Profits are indeed expected to fall 27% in Carnival's fiscal year ending Nov. 30, but in its past two quarterly reports, the company topped estimates by double-digit percentages. One downside: Management scrapped the dividend late last year.

Archer Daniels Midland buys, stores, processes and ships crops. Over the long term, its usefulness to a hungry planet seems assured. In the short term, its profits can swing with the frenzy of a futures pit. Last quarter, the company missed earnings forecasts by 30%. The quarter before it beat estimates by 33%. The stock is nine times forecast earnings for its current fiscal year ending June 30, but 12 times next year's lower forecast. Still, the higher of the two numbers seems plenty reasonable compared with the broad stock market. Shares pay 2%. Below are listed these and two other stocks with single-digit P/Es.

—Jack Hough

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