The price/earnings ratio of the Standard & Poor’s 500 right now is unusually high up there at 40. It’s only been higher than that one other time: at the peak of the 1999/2000 internet stock craze. The p/e measures how much in earnings the investor is receiving for the price being paid.
Valuation like this is out of favor these days as modern investment managers tend to prefer modeling portfolios based on expected earnings. This techniques of stock selection based on p/e, book value and similar metrics isn’t keeping up with the performance of Tesla TSLA and bitcoin.
From a strictly contrarian standpoint, therefore, it might be worthwhile to apply the method again. Emphasis on the “might be.” If you could find equities based on Benjamin Graham’s The Intelligent Investor — “undervalued” — what would they look like?
Here are 4 examples that might fit the mold for investors thinking of going against the grain.
Big 5 Sporting Goods BGFV
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The specialty retail company is enjoying a solid up trend from September/October, 2020 to now. The price/earnings ratio is 5.77 and it’s trading at 1.35 book value. Earnings this past year are great and the 5-year record is good as well.
Big 5 Sporting Goods is paying a 4% dividend. Shareholder equity greatly exceeds long-term debt. The short float is high at 11% which suggests quite a few non-believers — but if they’re ever forced to cover that could fuel a rally.
As it follows the price of the underlying precious metals, this AMEX-traded gold miner continues to trend downward. It’s definitely some kind of a value stock with a p/e of just 8 and available for purchase at just slightly above its book value.
Earnings this past year are way off but the record over the past 5 years looks good. Caledonia Mining has no long-term debt. The company pays a dividend of 3.06%. The stock is lightly traded at just about 100,000 shares daily.
This real estate investment trust is steadily upward trending for the last 12 months. Dynex Capital’s earnings have been excellent last year and over the previous 5 years. Analysts who follow the sector predict a less-than-decent couple of quarters just ahead. The company pays an 8% dividend. The p/e is 2.7 and it’s trading at just below book value. The NYSE stock trades about half a million shares daily.
This NASDA NDAQ Q-traded property and casualty insurance company is trading at just 1.42 book and with a price/earnings ratio of a mere 9.2. Although analysts are predicting a tough year ahead, the past year’s earnings are in the green. It’s the same thing with the past 5 years. The company’s long-term debt is tiny.
Those are 4 value stocks based on key Benjamin Graham-style metrics. To see how this type of analysis contrasts with that of modern growth stock managers, read How Cathie Wood Beat Wall Street By Betting Tesla Is Worth More Than $1 Trillion.
Stats courtesy of FinViz.com.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.