The P/E ratio is a strong indicator of whether a stock is a good value, and the lower the better. For this reason, many of the stocks with the lowest P/E ratios are broadly held by the investors GuruFocus tracks. However, a low P/E ratio stock requires further investigation, as the company could be in terminal decline, belong to an industry with endemic problems, or have other unfavorable valuations that make it unattractive as an investment.
The P/E ratio is calculated by dividing a stock’s price per share by its earnings per share. For example, Google shares opened for $805.30, and the company has trailing 12-months earnings per share of $33.32. Dividing the share price by EPS produces a P/E ratio of approximately 24.
A list of stocks with the lowest P/E ratios held by the most Gurus in the fourth quarter can be generated using the All-in-One Screener. These stocks are: American International Group Inc. (NYSE:AIG), Ford Motor Co. (NYSE:F), Vale SA (NYSE:VALE) and US Airways Group Inc. (NYSE:LCC).
AIG has a P/E ratio of 2.6, and 45 Gurus holders. The company’s shares have gained 38% over the past year to $37.67 per share on Wednesday, and the company has trailing 12-months earnings per share of $14.59.
Though AIG’s earnings per share were in the triple digits in 2006, it had two years of losses when it fell on hard times during the recession. It is recovering though, with its four recent straight quarters reporting profit.
The low P/E and recovering business of AIG enticed seven Gurus to buy shares in the fourth quarter. The holder of the largest position in AIG is Bruce Berkowitz, who has netted 7.47 percent of its shares outstanding in one fund and 5.82 percent in another.
AIG will disclose its fourth quarter financial results tomorrow, Feb. 21, 2013.
Ford Motor Co. (NYSE:F)
Ford has a P/E of 3, and is held by 21 Gurus. The low P/E comes from having a stock price of $12.60, after declining 1.2 percent over the last year, and trailing 12-months earnings per share of $4.65.
Ford’s earnings per share have been improving annually since it had a loss per share from 2006 to 2008. It has not been as cheap – based on its P/E ratio – as it has been in 2012 at any other time in its history, as seen in the chart below:
- Warning! GuruFocus has detected 1 Warning Sign with AIG. Click here to check it out.
- AIG 15-Year Financial Data
- The intrinsic value of AIG
- Peter Lynch Chart of AIG
F data by GuruFocus.com
This prompted four Gurus to start positions in Ford in the fourth quarter. David Tepper owns the largest position with 11.2 million shares, or 3.1 percent of his assets managed, though he sold 464,000 shares in the fourth quarter.
Vale SA (NYSE:VALE)
Vale has a P/E ratio of 4.7, and is held by 14 Gurus. Its P/E ratio is derived from its stock price of $18.58 on Wednesday and trailing 12-months earnings per share of $3.72. Vale’s EPS have also been on an uphill climb since falling in 2009, though it never reported an annual loss throughout the decade.
VALE data by GuruFocus.com
No Gurus began new positions in Vale in the fourth quarter, but four increased their stakes in the company. Jeremy Grantham is the biggest shareholder of the Gurus, with 0.17 percent of its outstanding shares, or 8.7 million. He has been selling the stock recently, having reduced his stake to almost one-third of its size in the fourth quarter of 2011.
US Airways Group Inc. (NYSE:LCC)
US Airways Group has a P/E of 4.3, and is held by 14 Gurus as well. The company’s trailing 12-month earnings per share are $3.81, after a strong $1.51 EPS in the third quarter. In the last decade, it has had just five years of positive earnings per share. It also has a stock price of $13.33 on Wednesday, after it increased almost 50% over the last 12 months.
US Airways Group’s P/E has fluctuated greatly over the past five years:
LCC data by GuruFocus.com
The largest holder of US Airways shares is David Tepper, who owns 12 million, which is equal to 7.43 percent of the airline. After three consecutive quarters of buying, he reduced the position by about 1.5 million shares in the fourth quarter.
To screen for more similar stocks, try the All-in-One Screener.