A trawl through companies with low P/E ratios can often turn up some intriguing results, from possible rising stars to dead men walking.
It can often be fun running stock filters to see what comes through, and I while away hours searching for all sorts of complex combinations of 'highest this, and lowest that, combined with most recent something else', and so on. But recently I thought I'd do something simple for a change, and I just had a look at companies with the lowest Price to Earnings (P/E) ratios.
On its own, the P/E is meaningless, but it can pay to think around it and wonder why a company might have an unusually low one (or an unusually high one), and I found a few companies that definitely warrant further investigation -- for education purposes if nothing else.
Aerospace again
Having been impressed by the prospects for QinetiQ (LSE: QQ) last week (whose share price, incidentally, is up 10% in the few days since I shared my enthusiasm), my eye fell once again on fellow aerospace and defence contractor Aero Inventory (LSE: AI), a company I first looked at in early May. Since then its forecast for 2010 has fallen back a bit, but the company is still on a prospective P/E of just 2.2, and with the 2009 year ending on 30 June, I'd be surprised if current forecasts turn out to be wildly wrong.
With 2010 forecasts looking fairly flat now (Earnings Per Share growth of 5% expected), the low Prospective PEG of 0.3 is perhaps not as attractive as it might at first seem. Having said that, with its prospective dividend yield at a mighty 14%, even flat future earnings look good.
But there's a "but", and it's a big one.
I recently talked about the importance of cash flow, and that's where Aero Inventory is struggling badly -- despite positive reported earnings, cash flow per share has been strongly negative for the past five years! That makes the suggestion from the last interim statement that "the board has decided that in the near term the company's focus will be on cash generation" seem like a "Well, duh!" moment.
I can't see any middle ground for this company's shares -- if you buy them now they'll either fly or you'll lose the lot, I reckon, and I really wouldn't like to guess which.
And Trafficmaster too
Trafficmaster (LSE: TFC) is one that keeps crossing my radar, and despite recent rises the shares are still on a low P/E of just over 6 (and a PEG of 0.25). I last wrote about the company in March, when it looked like there was a good recovery story unfolding. At the time, with the price on 18p, I opined that further good results could make the shares look like quite a bargain.
And I'm happy to report that, at today's price of 32p, they're up a whopping 77% in less than 3 months. That clearly looks like a recovery from an unfairly depressed price, and future gains will probably be less dramatic. But I still think there's some good organic growth to come for those who want to stake their claim for a share of future earnings.
A stab in the dark
Now, here's one I'd ever even heard of until I noticed its low P/E of just over 5 and super-low PEG of 0.1. The company is Velti (LSE: VEL), an AIM tiddler with a market cap of £50m, which provides some kind of advertising and marketing software for the mobile phones business. Other than that, I know nothing of its business, but the numbers make me sit up and take notice.
After growing earnings for the past few years (with 2008 still provisional), forecasts for 2009 and 2010 suggest EPS growth of 100% and 30% respectively. That is based on only one brokers' forecast, and that's the company's house broker, but it does look impressive. Cash doesn't look to be an obvious problem, as 2007 saw positive cash flow to match positive earnings (and we're still waiting for the 2008 figure).
There might well be a huge "gotcha" out there somewhere, and I certainly wouldn't rush out and buy shares based on a quick look at the numbers, but I'm intrigued enough to want to investigate further. If you know anything about Velti (or either of the other two companies), please do feel free to add a comment below.
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