Over the last few weeks, I have taken multiple approaches to evaluating stocks, with one article focused on overvalued stocks, and another on undervalued stocks. In both articles, the research centered around determining valuation by looking at P/E ratios, but along the way I encountered a lot of stocks that looked undervalued at first glance, but wound up actually not being a good value at all.
This week I want to focus on a few of those companies. As I have discussed in the past, when I begin my searches for attractively-valued stocks, I like to begin narrowing down the overall stock universe to those stocks which have P/E ratios between 15 and 20. I have found through the years that this is typically where stocks find their natural trading range (obviously some sectors tend to trade at much higher or lower valuations), and that it how I began today's search.
Each of the following stocks has a P/E ratios lower than 20, but each also trades at a valuation greater than its industry's average. In some cases the valuations can be partially accepted due to upbeat earnings growth estimates, but in all cases there are better values to be found within each sector.
Let's be clear, the point of this article is not to suggest that current shareholders quickly move to close out their positions, but merely to suggest that investors looking to jump into these stocks may want to consider an alternate stock with a more attractive valuation and greater future stock appreciation potential.