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Three Attractive, Low P/E Ratio Stocks

Many value investors use the price-to-earnings ratio as a measure of cheapness and buy stocks with low P/E ratios to maximize earnings yield. This strategy seems obvious, but there is a catch: many cheap, low P/E stocks bear incredible risks. Some are on the verge of bankruptcy.

To correct for this, a list of 187 stocks were found which have P/E ratios under 10 and have low bankruptcy risk as measured by the Altman Z-score. This list is provided at the bottom of this article as an invaluable reference for value-minded investors.

As a demonstration of how to use this list, I selected the three cheapest names which have produced attractive free cash flows and earnings over the past ten years. This list is a very useful starting point for value investors.

I found the specialty semiconductor company OmniVision Technologies Inc. (NASDAQ:OVTI), the oil refining and marketing company Tesoro Corporation (NYSE:TSO), and the home health provider Almost Family Inc. (NASDAQ:AFAM). All of these stocks have historical long-term cash flows and earnings that are attractive, which is intriguing since they are cheap on a low P/E basis:

Earnings and Free Cash Flows for the Last 10 Years

Value

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

TTM

AFAM NI

2

1

2

1

8

4

8

16

25

31

22

OVTI NI

-1

15

59

76

89

24

65

-37

7

124

150

TSO NI

88

-117

76

328

507

801

566

278

-140

-29

673

AFAM FCF

1

2

4

6

4

4

6

8

25

32

24

OVTI FCF

2

-3

34

87

109

-41

37

13

35

127

147

TSO FCF

5

-146

346

506

500

703

575

66

226

88

836

As you can see, AFAM, OVTI, and TSO all have 10-year histories of average positive earnings and positive free cash flow to equity. Moreover, their annual results are generally positive – the sums of their cash flows and their earnings are not based on a freak event in one year. These stocks are recommendable on the basis of quality (low bankruptcy risk, long term positive earnings, long term positive free cash flows).

Moreover, these stocks are cheaply valued according to a variety of metrics. AFAM trades at a 0.74 price-to-book ratio, a 6.05 price to free cash flow ratio, and a 0.44 price-to-sales ratio. Similarly, OVTI trades at a 0.95 price-to-book ratio, a 8.96 price to free cash flow ratio, and a 0.75 price-to -sales ratio. TSO is also cheaply valued: it trades at a 1.02 price-to-book ratio, a 4.79 price to cash flow ratio, and a 0.14 price-to-sales ratio. These stocks are strong buy candidates for value investors because they are cheap and low risk.

Future articles will address additional stocks from the following list that are similarly attractive.

A List of Low Price to Earnings Stocks with “Safe” Altman Z-Scores

In order to choose stocks that are cheap, but are at low risk of bankruptcy, we need a quantitative predictor of credit risk. Fortunately, the Altman Z-Score can help distinguish value investments from value traps.

The Altman Z-score places companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed*” (Z-score < 1.81). This metric is surprisingly useful for identifying bankruptcy risk in the coming year. Atlman’s method of segmenting companies uses fundamental (financial statement) data and market capitalization only.** Beyond credit risk prediction, companies with higher Z-scores have been shown to outperform companies with lower Z-scores, in aggregate.

The Altman Z-score was recently (using financial data reported this year) calculated for hundreds of companies with P/E multiples under 10. Low P/E companies which scored in the “safe” zone are presented with below:

Stocks with P/E < 10 and "Safe" Altman Z-Scores

Ticker

Company

P/E

(TTM)

Altman Z-Score

(NASDAQ:ISIG)

Insignia Systems Inc.

0.62

9.64

(EAG)

American Defense Systems, Inc.

1.4

4.22

(NASDAQ:BSET)

Bassett Furniture Industries Inc.

1.59

4.03

(NASDAQ:WSTL)

Westell Technologies Inc.

1.76

4.57

(OTCPK:ABAT)

Advanced Battery Technologies, Inc.

1.89

6.39

(NASDAQ:PCO)

Pendrell Corporation

2.02

3.19

(NYSE:SFE)

Safeguard Scientifics, Inc.

2.16

4.19

(NYSEMKT:LGL)

The LGL Group, Inc.

2.36

4.42

(NASDAQ:WRLS)

Telular Corp.

2.39

6.28

(NYSEMKT:INTT)

inTEST Corp.

2.43

5.60

(NASDAQ:CHNR)

China Natural Resources Inc.

2.47

271.67

(NASDAQ:MAXY)

Maxygen, Inc.

2.54

20.36

(NYSEMKT:EVK)

Ever-Glory International Group, Inc.

2.58

3.14

(NASDAQ:PDEX)

Pro-Dex Inc.

2.69

3.23

(NASDAQ:USMO)

USA Mobility, Inc.

2.9

3.85

(NASDAQ:EDS)

Exceed Company Ltd.

2.95

4.55

(NASDAQ:DEPO)

DepoMed Inc.

3.07

5.47

(NASDAQ:KGJI)

Kingold Jewelry, Inc.

3.08

15.64

(NASDAQ:TCCO)

Technical Communications Corp.

3.13

10.02

(NYSEMKT:MSN)

Emerson Radio Corp.

3.27

4.42

(AERL)

Asia Entertainment & Resources Ltd.

3.58

12.53

(NASDAQ:CECO)

Career Education Corp.

3.72

3.25

(NYSE:OME)

Omega Protein Corp.

3.76

3.40

(NASDAQ:MNTA)

Momenta Pharmaceuticals Inc.

3.84

31.84

(NASDAQ:KLIC)

Kulicke & Soffa Industries Inc.

3.87

4.15

(NYSEMKT:RVP)

Retractable Technologies Inc.

3.94

3.19

(UPG)

Universal Power Group Inc.

4.17

3.11

(NYSEMKT:MCZ)

Mad Catz Interactive Inc.

4.5

3.76

(NASDAQ:PATK)

Patrick Industries Inc.

4.51

3.33

(NYSEMKT:BTN)

Ballantyne Strong, Inc

4.55

4.38

(NASDAQ:BRKS)

Brooks Automation Inc.

4.61

3.51

(NASDAQ:ISSI)

Integrated Silicon Solution Inc.

4.65

4.03

(NYSEMKT:SSN)

Samson Oil & Gas Limited

4.72

19.26

(NYSE:NX)

Quanex Building Products Corporation

4.78

4.36

(NYSE:VC)

Visteon Corp.

4.85

3.22

(NYSEMKT:SED)

SED International Holdings, Inc.

4.9

4.36

(NASDAQ:PWER)

Power-One Inc.

5

4.14

(NYSE:AT)

Atlantic Power Corporation

5.12

5.00

(NASDAQ:RBCN)

Rubicon Technology, Inc.

5.14

11.75

(NYSE:ESI)

ITT Educational Services Inc.

5.19

8.19

(OVTI)

OmniVision Technologies Inc.

5.24

4.21

(NYSE:NC)

Nacco Industries Inc.

5.29

3.34

(NASDAQ:LINC)

Lincoln Educational Services Corporation

5.31

3.84

(NYSE:GCI)

Gannett Co., Inc.

5.33

3.26

(NYSEMKT:PNS)

Pinnacle Data Systems Inc.

5.48

4.86

(NYSE:SHS)

Sauer-Danfoss Inc.

5.71

4.70

(OTCPK:KRSL)

Kreisler Manufacturing Corp.

5.83

4.89

(NYSEMKT:DIT)

AMCON Distributing Co.

5.85

9.21

(NASDAQ:IDSA)

Industrial Services of America, Inc.

5.91

5.25

(TSO)

Tesoro Corporation

5.96

4.26

(NYSEARCA:LMLP)

LML Payment Systems Inc.

6.01

4.73

(NASDAQ:ENTR)

Entropic Communications, Inc.

6.02

12.44

(NASDAQ:MDCO)

Medicines Co.

6.12

5.95

(NASDAQ:UCTT)

Ultra Clean Holdings Inc.

6.13

5.17

(AVCA)

Advocat Inc.

6.22

3.45

(NYSE:GLPW)

Global Power Equipment Group Inc.

6.4

7.07

(NYSE:VLO)

Valero Energy Corporation

6.55

3.78

(AFAM)

Almost Family Inc.

6.56

5.38

(NASDAQ:RCKY)

Rocky Brands, Inc.

6.58

3.09

(NASDAQ:AXTI)

AXT Inc.

6.62

5.32

(NYSEMKT:SEB)

Seaboard Corp.

6.66

5.53

(NASDAQ:AEIS)

Advanced Energy Industries, Inc.

6.68

4.44

(NASDAQ:CRUS)

Cirrus Logic Inc.

6.75

8.78

(NYSE:AVT)

Avnet Inc.

6.84

4.27

(NYSE:FCX)

Freeport-McMoRan Copper & Gold Inc.

6.85

3.46

(Pending:AM)

American Greetings Corp.

6.86

3.28

(NYSE:GLW)

Corning Inc.

6.91

3.60

(NYSE:ARW)

Arrow Electronics, Inc.

6.93

3.53

(NYSEMKT:SLI)

SL Industries Inc.

7

4.27

(NYSE:BPI)

Bridgepoint Education, Inc.

7.02

7.08

(NASDAQ:NANO)

Nanometrics Incorporated

7.03

6.42

(NYSEMKT:AE)

Adams Resources & Energy Inc.

7.06

8.27

(NYSE:SFD)

Smithfield Foods Inc.

7.1

3.47

(NYSE:CVI)

CVR Energy, Inc.

7.17

4.28

(NYSE:SAH)

Sonic Automotive Inc.

7.17

4.07

(NASDAQ:BTUI)

BTU International Inc.

7.26

3.19

(NASDAQ:SMRT)

Stein Mart Inc.

7.27

5.01

(NASDAQ:TIII)

Tii Network Technologies, Inc.

7.27

3.05

(NASDAQ:FSLR)

First Solar, Inc.

7.42

3.05

(NYSE:FRX)

Forest Laboratories Inc.

7.44

5.95

(NASDAQ:ZINC)

Horsehead Holding Corp.

7.49

3.48

(NASDAQ:NAFC)

Nash Finch Co.

7.53

6.05

(NYSE:FN)

Fabrinet

7.55

5.78

(NYSEMKT:DLA)

Delta Apparel Inc.

7.64

3.33

(NYSE:SNX)

La-Z-Boy Inc.

7.72

5.34

(NYSE:LZB)

SYNNEX Corp.

7.72

4.34

(NYSE:LXK)

Lexmark International Inc.

7.77

3.07

(NASDAQ:FXEN)

FX Energy Inc.

7.8

15.40

(CVH)

Coventry Health Care Inc.

7.81

3.09

(NYSE:CVX)

Chevron Corporation

7.82

4.51

(NASDAQ:VASC)

Vascular Solutions Inc.

7.9

12.87

(NASDAQ:WDC)

Western Digital Corp.

7.91

4.08

(NASDAQ:CBOU)

Caribou Coffee Company, Inc.

7.95

7.29

(NASDAQ:AEY)

ADDvantage Technologies Group Inc.

7.96

3.73

(NASDAQ:DELL)

Dell Inc.

8

3.50

(NASDAQ:GIII)

G-III Apparel Group, Ltd.

8.02

3.96

(NYSEMKT:VSR)

Versar Inc.

8.03

4.21

(NASDAQ:OPLK)

Oplink Communications Inc.

8.08

7.57

(NYSE:DV)

DeVry, Inc.

8.1

6.51

(NYSE:EGY)

Vaalco Energy Inc.

8.12

8.90

(NASDAQ:STRN)

Sutron Corp.

8.14

6.35

(MALL)

PC Mall Inc.

8.17

4.85

(NASDAQ:NSIT)

Insight Enterprises Inc.

8.21

4.81

(NYSE:POWR)

PowerSecure International, Inc.

8.21

3.47

(NASDAQ:CRWS)

Crown Crafts Inc.

8.26

4.65

(NYSEMKT:MEA)

Metalico Inc.

8.32

3.23

(NASDAQ:LCUT)

Lifetime Brands, Inc.

8.35

3.23

(NYSEMKT:VGZ)

Vista Gold Corp.

8.41

5.53

(NASDAQ:NUTR)

Coleman Cable, Inc.

8.44

4.38

(NASDAQ:CCIX)

Nutraceutical International Corp.

8.44

3.04

(NASDAQ:AMAT)

Applied Materials Inc.

8.45

5.04

(NYSEMKT:FRD)

Friedman Industries Inc.

8.49

7.14

(NASDAQ:OBCI)

Ocean Bio-Chem Inc.

8.52

4.32

(NYSE:TSN)

Tyson Foods Inc.

8.54

4.62

(NASDAQ:ANDE)

The Andersons, Inc.

8.56

4.13

(NASDAQ:ARCI)

Appliance Recycling Centers of America Inc.

8.57

3.35

(NASDAQ:NCIT)

NCI, Inc.

8.59

4.02

(SAI)

SAIC, Inc.

8.61

3.39

(NYSE:AVX)

AVX Corp.

8.63

7.46

(NASDAQ:NAII)

Destination Maternity Corporation

8.69

7.32

(NASDAQ:DEST)

Natural Alternatives International Inc.

8.69

4.93

(NYSEMKT:BDL)

Flanigan's Enterprises Inc.

8.71

3.21

(NYSE:WLK)

KBR, Inc.

8.76

3.86

(NYSE:KBR)

Westlake Chemical Corp.

8.76

3.46

(NASDAQ:LRCX)

Lam Research Corporation

8.78

5.15

(NASDAQ:PDLI)

Northrop Grumman Corporation

8.78

4.33

(NYSE:NOC)

PDL BioPharma, Inc.

8.78

3.06

(NYSE:ADM)

Archer Daniels Midland Company

8.83

3.65

(NASDAQ:ATML)

Atmel Corporation

8.84

7.00

(NASDAQ:TESS)

TESSCO Technologies Inc.

8.84

5.43

(NYSE:SUP)

Diamond Offshore Drilling Inc.

8.85

5.21

(NYSE:DO)

Superior Industries International, Inc.

8.85

4.02

(NASDAQ:MANT)

ManTech International Corporation

8.86

3.71

(NYSE:LLY)

Eli Lilly & Co.

8.89

3.62

(NYSE:MFB)

Maidenform Brands, Inc.

8.92

4.58

(NYSEMKT:CMT)

Core Molding Technologies Inc.

8.95

3.81

(NASDAQ:FLXS)

Flexsteel Industries Inc.

9

5.63

(NYSE:KRO)

Kronos Worldwide Inc.

9

3.67

(NYSE:ARO)

Aeropostale, Inc.

9.06

7.79

(NASDAQ:HITK)

Dover Saddlery, Inc.

9.1

14.24

(NASDAQ:DOVR)

Hi Tech Pharmacal Co. Inc.

9.1

3.46

(NYSE:GME)

GameStop Corp.

9.11

4.60

(NYSE:SWC)

Stillwater Mining Co.

9.11

3.45

(NASDAQ:IXYS)

IXYS Corp.

9.12

5.09

(NYSE:COP)

ConocoPhillips

9.15

3.14

(NYSE:CO)

China Cord Blood Corporation

9.16

12.94

(NYSE:MOS)

The Mosaic Company

9.16

6.34

(NASDAQ:JCS)

Communications Systems Inc.

9.17

6.84

(NASDAQ:KTCC)

Key Tronic Corp.

9.18

3.86

(NYSE:BBY)

Best Buy Co. Inc.

9.19

4.08

(NASDAQ:MASC)

Material Sciences Corp.

9.2

4.76

(NYSE:EBF)

Ennis Inc.

9.26

4.31

(NYSE:WNR)

Western Refining Inc.

9.27

4.05

(NYSE:HFC)

CF Industries Holdings, Inc.

9.3

4.61

(NYSE:CF)

HollyFrontier Corporation

9.3

3.37

(NASDAQ:STRA)

Strayer Education Inc.

9.32

10.17

(NASDAQ:SYNL)

Synalloy Corp.

9.36

5.13

(NYSE:KAI)

Kadant Inc.

9.38

3.14

(NYSE:WBC)

WABCO Holdings Inc.

9.44

4.51

(NYSEMKT:WYY)

WidePoint Corp.

9.44

4.35

(NASDAQ:CPLA)

Capella Education Co.

9.45

8.67

(NASDAQ:KOSS)

DDI Corp.

9.46

4.91

(NASDAQ:DDIC)

Koss Corp.

9.46

3.97

(NASDAQ:GPRE)

Green Plains Renewable Energy, Inc.

9.47

3.13

(NYSE:XOM)

Exxon Mobil Corporation

9.48

4.92

(NASDAQ:MPAC)

MOD-PAC Corp.

9.49

5.91

(NASDAQ:ASTX)

Astex Pharmaceuticals, Inc.

9.5

13.06

(NASDAQ:KLAC)

KLA-Tencor Corporation

9.5

5.76

(NASDAQ:DGIT)

DG FastChannel, Inc.

9.51

10.69

(NYSE:RTEC)

Rudolph Technologies Inc.

9.53

3.25

(NASDAQ:SRLS)

SeraCare Life Sciences, Inc.

9.55

5.60

(NASDAQ:MSFT)

Microsoft Corporation

9.56

4.79

(NASDAQ:PLPC)

Preformed Line Products Co.

9.6

4.67

(NASDAQ:PCCC)

PC Connection, Inc.

9.7

6.73

(NASDAQ:EBIX)

Bunge Limited

9.72

6.99

(NASDAQ:INTX)

Ebix Inc.

9.72

4.92

(NYSE:BG)

Intersections Inc.

9.72

3.20

(NYSE:TKR)

Timken Co.

9.76

4.12

(NYSE:VCI)

Valassis Communications Inc.

9.79

3.22

(NASDAQ:STEC)

Air T Inc.

9.8

9.82

(NASDAQ:AIRT)

STEC, Inc.

9.8

5.95

(NASDAQ:TECD)

Tech Data Corp.

9.8

5.42

(NASDAQ:EEI)

Ecology & Environment, Inc.

9.82

4.16

(NASDAQ:MKSI)

MKS Instruments Inc.

9.86

8.99

(NASDAQ:GENC)

Gencor Industries Inc.

9.98

6.59

(NASDAQ:TQNT)

TriQuint Semiconductor, Inc.

9.98

5.76

(NASDAQ:NVLS)

Novellus Systems, Inc.

10

3.39

The firms on this list are value buys that have a low probability of bankruptcy. As a group, they should offer attractive risk-adjusted returns. On an individual stock basis, additional research is warranted.

*“Distressed” was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

**Volatility has be incorporated into a credit scoring model to improve accuracy, but this would reduce the value of a fundamentals-only model for indicating companies for option strategies.

Source: 3 Attractive, Low P/E Ratio Stocks And More With Safe Credit Scores