2020 Value Stocks List: Lowest P/E Stocks (+The Top 3 Value Stocks Now)

Value investing is a broad term, and can mean different things to different investors. Value investors typically look for cheap stocks, although there is no single definition of what constitutes a cheap stock. Generally, value investors look for stocks that are trading below intrinsic value. This is the basic philosophy adhered to by Warren Buffett, arguably the greatest value investor of all time.

Value stocks are often classified by low valuation ratios. While there are many ways to value stocks, the most common valuation metric is the price-to-earnings ratio, otherwise referred to as the P/E ratio. Broadly speaking, value investors typically look for stocks with low P/E ratios.

For this article, value stocks are defined as the 100 stocks in the Russell 2000 with the lowest forward price-to-earnings ratios. With this in mind, we compiled a list of these 100 value stocks.

Breaking Down The P/E Ratio

The price-to-earnings ratio, or P/E ratio, is perhaps the most frequently-utilized valuation metric for stock investors. The P/E ratio essentially values stocks based on a multiple of the company’s earnings-per-share. It is calculated by dividing the stock price by the company’s earnings-per-share. The earnings-per-share of a company represents its net income on a per-share basis. This can be found on a company’s income statement.

P/E ratios can either be calculated on a trailing basis (by using the company’s trailing 12-month EPS) or on a forward basis (by using the company’s expected EPS over the next 12 months). The advantage of the trailing multiple is that it uses verifiable EPS results instead of a projection which may or may not materialize, while the forward P/E ratio allows investors to look ahead, which many investors believe is more predictive.

Consider a stock that has a current share price of $100, and earnings-per-share of $5.00. In this case, the stock has a P/E ratio of 20 on a trailing basis. There are only two reasons why the stock price would rise above $100. Either the company grows its earnings-per-share, or the P/E ratio expands above 20.

For example, if EPS increases to $6.00 in the following year, the same P/E ratio of 20 would result in a share price of $120, for a 20% gain. The stock price could still rise to $120 (or higher) without the underlying EPS growth, but the P/E ratio would rise as a result. To that end, if EPS remain flat at $5.00 and the share price rises to $120, the P/E ratio would expand to 24.

Consequently, when it comes to movement in share prices, returns are generated for investors either through earnings-per-share growth, or a rising P/E ratio. In our view, the best investments are stocks that deliver a combination of growing EPS, an expanding P/E ratio, and dividends to boot.

A Real-Life Example

To illustrate, consider the case of Dividend Aristocrat AbbVie Inc. (ABBV), which we believe to be an undervalued stock. In 2019, AbbVie reported adjusted earnings-per-share of $8.94, an increase of 13% from 2018. For 2020, AbbVie expects adjusted earnings-per-share in a range of $9.61 to $9.71. At the midpoint of guidance, AbbVie’s EPS is expected to increase 8% in 2020, to $9.66.

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