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This is the third and final installment of the P/E Trap series. If you are looking for Part 1, you can find it here. 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. These P/E ratios are misleading to investors looking through stock screeners or simple valuation data. Today, I share three more of these companies.

Ford Motor Co. (F)

(click to enlarge)ford one year chart

According to Yahoo Finance, Ford has a P/E ratio of 2.41. Ford made 17.7 billion dollars in net income in the last four quarters. 12.2 billion of this net income was from a positive one time tax event. This is equal to roughly 68% of the earnings in the last four quarters. The P/E ratio excluding this tax event is closer to 7.2. This still appears to be an attractive P/E ratio but I am no expert on the automotive industry.

Data and chart from Yahoo Finance.

Five Star Quality Care, Inc. (FVE)

(click to enlarge)fve 1 year

According to Yahoo Finance, FVE has a PE ratio of 4.17. FVE made roughly 60 million in net income in the last four quarters. 51.5 million of that income was from a positive one time tax event. This tax event accounted for 86% of earnings in the last four quarters. Excluding the tax event, the P/E ratio is closer to a whopping 29 which is far different than the P/E Yahoo Finance shows to investors.

Data and chart from Yahoo Finance.

Vonage Holdings Corporation (VG)

(click to enlarge)vg 1 year

According to Yahoo Finance, Vonage has a P/E ratio of 1.57. Vonage made 376 million in net income in the last four quarters. 324.5 million of that net income was from a one time positive tax event. This constitutes 86% of the net income in the last four quarters. Excluding the one time tax event, the P/E ratio is closer to 10.8. This is still a solid P/E ratio but nowhere near the absurdly low P/E ratio of 1.57.

Data and chart from Yahoo Finance.

Conclusion:

There are many more companies that have low P/E ratios due to one time tax events. Hopefully with this three part series investors realize that the P/E ratio listed on stock screeners and Yahoo Finance is often misleading and you must account of one time events in order to get a proper valuation. If you are looking for a trade out of the information from this article, FVE is the closest thing I can offer. With such a high P/E on a stock reaching new highs, a short position might be worthwhile once it cracks.

Source: Beware These Low P/E Traps (Part 3)