Compare price-earnings ratios and find cheap stocks

  • No one knows what future corporate earnings will be, but there are signs that certain parts of the global stock market have become attractive in terms of valuation.
  • WisdomTree provides a practical dashboard to better assess price-to-earnings ratios for all sizes of companies in the United States and around the world.
  • A few funds look particularly cheap to me right now, based on both current and future earnings estimates.

I still think investors should have their shopping lists ready before the holiday season. No, we’re not talking about your favorite items on Amazon. Rather, I’m interested in stocks in the US and around the world that now have attractive price-to-earnings (P/E) ratios and are worth adding to your basket.

To get straight to the point: No one knows how high future corporate profits will be. No one ever knows. Good analysts and investors use a mosaic of data points and weigh all the evidence when making a decision to buy or sell a security.

Jeremy Schwartz, Global Chief Investment Officer at WisdomTree, gave me some interesting pointers that will be of great use to investors looking for hot spots in the equity universe. If you search through the daily dashboard from WisdomTree, you will quickly discover that certain niches are downright absurdly cheap, even if you lower the earnings estimates for the companies in them by, say, 20%.

For example, the WisdomTree US MidCap Earnings Fund (NYSE: ) only owns high-yield midcap companies in the US stock market. Its price-to-earnings (P/E) ratio is just 9.3, while its forward P/E is also in the single digits at 9.7. The chart below shows that valuations of virtually all SMID cap ETFs offered by WisdomTree (which often contain only high-yield companies) are attractive.

US ETF Ratings

Source: WisdomTree

Speaking of small-cap stocks, according to a Bank of America Global Research study using FactSet data, domestic “small-cap” stocks are historically a bargain compared to their large-cap counterparts. For example, the small-cap index’s relative forward P/E versus the Russell 1000 large-cap index is approaching its lowest level since the dot-com bubble, when large-cap growth eclipsed small-caps.

US Small Caps: Compelling Relative Value

Source: BofA Global Research

Including this forward multiple, BofA expects US small-cap stocks to significantly outperform large caps by about four percentage points per year over the next 10 years. As a reminder, small-cap stocks have evolved since 2006 less developed than large caps.

Does Alpha also exist apart from Mega Caps?

Source: BofA Global Research

But not only domestic SMID hoods look cheap. Let’s revisit the WIsdomTree dashboard and venture into the international ETF realm.

Do you like investing in dividend stocks? If so, then the WisdomTree International High Dividend Fund (NYSE: ), which invests in high-yield stocks in developed markets outside the US and Canada, may be worth considering. This is because it trades at only 8.6 times last year’s earnings per share.

Single-digit P/E numbers are common outside the US

Source: WisdomTree

What about one of the hardest hit groups of countries ever – emerging markets? The WisdomTree Emerging Markets High Dividend Fund (NYSE: ) invests primarily in the financial sector as well as in resource and energy companies. Its combined share of the growth sectors of information technology, communications services and consumer discretionary is just 18%. Trading at a spectacular 5.6x last year’s earnings and a forward P/E of just 6.0, this division would certainly benefit from a value rotation.

Conclusion

Much has been written about reviews. And at least as often the objection that “we don’t know what the profit will be” is raised. The reality is that in addition to large US growth companies, there are many cheap areas of the global stock market. With P/E multiples in the single digits, now is a good time to at least take a sip and invest in some of these cheap niches.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

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