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The listed P/E ratio on stocks can often be misleading. That is especially the case for companies that have had a large positive one-time tax event. On September 18, I wrote Part 1 about companies that were listed as having a P/E ratio below 5 due to a one-time tax event. If you are looking for Part 1, you can find it here.

Today, I bring you three more:

Krispy Kreme Doughnuts, Inc. (KKD)

(click to enlarge)kkd 1 year

According to Yahoo Finance, Krispy Kreme has a P/E of 3.5. Krispy Kreme Doughnuts made roughly 160 million in net income in the last four quarters. 137.8 million of that net income came from a positive tax event. That is equal to 87.1% of the net income. Excluding the tax event, the P/E ratio is closer to 24, which needless to say, is much larger than 3.5.

Data and chart from Yahoo Finance.

Material Sciences Corporation (MASC)

(click to enlarge)masc 1 year

According to Yahoo Finance, MASC has a P/E of 3.72. MASC made roughly 26.5 million in net income in the last four quarters. 15.6 million of that net income was from a positive one-time tax event. That is equal to 59% of the net income. Without the one-time tax event, the P/E is closer to 9. Still not a bad P/E ratio, but quite different than the one listed on Yahoo Finance.

Data and chart from Yahoo Finance.

Mercantile Bank Corp. (MBWM)

(click to enlarge)mbwm 1 year

According to Yahoo Finance, MBWM has a P/E ratio of 4.01. MBWM made roughly 40.2 million in net income in the last four quarters. 27.3 million of that net income was from a one time positive tax event. That is equal to 68% of the net income. Excluding the one time tax event the P/E ratio is closer to 11.5.

Data and chart from Yahoo Finance.

Conclusion

Once again potential short opportunities arise from the misleading P/E ratios that come from this tax event. If I didn't value the ability to sleep soundly at night I would short KKD seeing that the stock appears to be coming off a top and once the P/E returns to its higher level some investors may not like the stock as much. The other two appear to have healthy P/E ratios but shouldn't be viewed as the most undervalued stocks of the year, which their P/E implies.

Source: Beware These Low P/E Traps (Part 2)