Bottom Fishing: 3 ETFs with Historically Low P/E Ratios

The old cliche about catching a falling knife? It's particularly relevant when it comes to picking an exact bottom in some of the most beaten down industries.

Yet for those who may fancy themselves as long-term value seekers, it may be difficult to ignore some the of the low price-to-earnings (P/E) ratios on a variety of ETFs. In fact, some of these areas have been so decimated by the gloom-n-doom crowd, catching the proverbial knife may be a worthy endeavor.

Let's start with the Dow Jones US Insurance Index (IAK). It's been taken down by the fear of subprime-related catastrophe yet to be exposed. The investment is near 52-week lows as it is. And yet, what industry is more consistently profitable to its shareholders than insurance companies? (Ask Warren Buffett if you're not entirely sure.) Point of fact... IAK is currently trading at a multiple of just 8.7!

Had you asked at the start of the 21st century what the most promising industry in the U.S. economy might be, many would have exclaimed, "Biotech." Yet the promise has not lived up to the hype.

That said, the historical multiple for biotech companies often commanded north of 20. And today, the iShares Nasdaq Biotechnology Index (IBB) is at a paltry 11.

In effect, we've seen IBB go nowhere for a year. And after having peaked at 89 around the market's October 9 highs, it has lost 12.5%. No worse than the markets, of course. But with an attractive P/E of 11, might biotech be venerable enough for risk takers?

The lowest-hanging fruit, the deepest swimming fish in the seas, is the Homebuilder Index (XHB).

Is it possible, for example, that the endless barrage of bad news for home prices and home sales has already been accounted for by stock prices? Is a P/E of 4.25 for the S&P Homebuilder Index (XHB) reflecting the opportunity for long-term value investors to get in while the murkiest of outlooks actually scream, "Sale of the Century?"

Looked at another way, it's clear that home prices will continue falling. It's also clear that the homebuilders will continue struggling in their operations, perhaps for a year or two or three. That said, stock prices tanked long ago. And that fact may mean that a relative floor may be in place for the price of shares themselves.

This one may not be for the faint of heart, of course. The S&P Homebuilder Index Fund (XHB) has traded like a dot bomb. That said, ask those who got back on the "net express" with Google (GOOG) and Amazon (AMZN) and Blue Nile (NILE) if they are satisfied with their decisions?

Comments

[Robin_BoyWo...:]

When homebuilders yearly earnings go negative, their PEs will be even lower...I'd short any bounce, then wait till some go bankrupt.

2008 Feb 02 12:33 PM