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Stocks with low P/E ratios are relatively likely to be trading at discounts compared with stocks with higher P/E ratios. However, not all stocks with low P/E are undervalued. In fact, some of the low P/E stocks deserve the valuations. For example, most bankrupt companies become low P/E stocks at some point. Therefore, investors should carefully study these stocks before investing in them. One of the most practical ways of picking low P/E stocks is to focus on those with positive institutional transactions. Institutional investors are generally smarter than ordinary investors because institutions usually devote significant resources in researching stocks and the market.

Below we compiled a list of low P/E stocks with recent institutional transactions. All companies have at least $10 billion market cap and institutional transactions of over 0.3% of outstanding shares. Their P/E ratios and forward P/E ratios are both lower than 15. The market data is sourced from Finviz.

Ticker

Company

P/E

Forward P/E

Institutional Transactions

(NYSE:MOS)

The Mosaic Company

10.53

10.07

5.20%

(NYSE:MMM)

3M Co.

14.22

13.27

3.87%

(NYSE:SCCO)

Southern Copper Corp.

12.3

12.68

1.44%

(NYSE:PH)

Parker Hannifin

12.2

10.29

1.37%

(NYSE:KSS)

Kohl's Corp.

11.1

9.45

0.78%

(NYSE:HES)

Hess Corporation

10.15

8.06

0.66%

(NYSE:COF)

Capital One Financial

6.35

8.16

0.64%

(NYSE:F)

Ford Motor Co.

7.25

7.62

0.58%

(NYSE:HUM)

Humana Inc.

12.02

11.87

0.47%

(NYSE:MS)

Morgan Stanley

9.84

8.75

0.45%

(NYSE:MPC)

Marathon Petroleum

4.39

6.38

0.39%

(NYSE:VLO)

Valero Energy

5.38

5.77

0.35%

(NYSE:CI)

Cigna Corp.

8.29

8.12

0.34%

(NYSE:CPB)

Campbell Soup Co.

13.48

12.94

0.33%

(NYSE:GM)

General Motors

5.47

6.16

0.32%

(NYSE:NEM)

Newmont Mining

13.43

10.56

0.32%

The Mosaic Company has the highest institutional transactions. The company produces and markets concentrated phosphate and potash crop nutrients for the global agriculture industry. For the three months ending November 30, 2011, Mosaic has total revenues of $3 billion, up from $2.7 billion in the same period a year ago. MOS has a market cap of $23.5B and institutional transactions of 5.20%. MOS's P/E ratio is 10.53 and its forward P/E ratio is 10.07. At the end of September, there are 38 hedge funds with MOS positions. Ken Fisher's Fisher Asset Management had $185 million invested in MOS at the end of the third quarter last year.

3M Co also has high institutional transactions of 3.87%. It has a market cap of $59B, a P/E ratio of 14.22, and a forward P/E ratio of 13.27. The diversified technology company reported revenues of $7.5 billion for the third quarter of 2011, versus $6.9 billion for the same quarter a year earlier. MMM is also quite popular among hedge funds tracked by us. There are 28 hedge funds disclosed to own the stock at the end of September. For example, Boykin Curry's Eagle Capital Management invested 3.73% of its portfolio in MMM. As of September 30, 2011, Eagle Capital had $328 million invested in MMM.

Valero Energy Corporation has the lowest forward P/E ratio among the stocks listed above. Its forward P/E ratio is only 5.77 and it also has a low P/E ratio of 5.38. The stock has a market cap of $12B and institutional transactions of 0.35%. Valero is an energy company that refines and markets petroleum in North America. The company had total revenues of $33.7 billion for the third quarter of 2011, versus $21 billion for the same quarter of 2010. At the end of September, twenty-nine hedge funds reported to own VLO in their portfolios. David Tepper's Appaloosa Management had nearly $100 million invested in VLO at the end of the third quarter.

We think a portfolio of these 16 stocks can provide enough diversification for investors. Additionally, their low current P/E and forward P/E ratios, and their positive institutional transactions indicate that they have potential to generate decent returns in the future. We strongly recommend investors to consider purchasing some of these cheap stocks that smart money is buying.

Source: 16 Cheap Stocks Smart Money Is Buying