Today we are going to be looking at cheap stocks, so let’s start by considering what makes a stock cheap. It is not, of course, the share price. A stock can be cheap at $500 or overpriced at $1; it all depends on what you are getting for the money you pay. The most common quick and dirty measure of this is the Price to Earnings Ratio, or P/E. If a stock has a low P/E, it means that you are getting a relatively high amount of earnings for the money you are paying.
But what exactly does that mean? What does it indicate?
It’s a question that is rarely asked, and even more rarely answered. The Street allows certain stocks to trade at low P/Es not because it has overlooked them, but frequently because the prevailing sentiment is that the company’s growth is unimpressive, or that it is on thin ice financially or legally. In other words, low P/Es mean pessimism while high P/Es mean optimism. When we look at growth companies, the trick is to find cases in which the high P/Es are justified, but when we look at value companies, the trick is to find cases in which the low P/Es are not justified.
Starting with low P/E companies, I’ve identified the five that seem most likely to exceed the Street’s low expectations based on a combination of internal corporate strategies and macroeconomic trends—by which I mean the many different clues, available if you know where to look, as to how people’s spending habits are changing. As always consider these ideas just that, ideas, and do your own research before making any investment decision.