Value investors sometimes like to use a low P/E ratio as the main indicator of value. However, just as not all high-P/E stocks should be avoided, not all low-P/E stocks are sturdy bargains — they can be value traps, spiraling downwards and taking investments with them.
Let’s take a look at four stocks trading on the TSX index with low P/E ratios at the moment and see whether they look like value opportunities or value traps.
Equitable Group (TSX:EQB)
If you’re low on financial service stocks and fancy a flutter on a decently valued ticker, Equitable Group is trading at its book price with a low P/E ratio of 7.2 times earnings. Though stronger track records can be found on the TSX index, a one-year past earnings growth of 2.6% continues a positive five-year growth streak typified by a rate of 12.7%.
Equitable Group’s comparison of assets to equity is moderate, making for a so-so balance sheet, while its dividend yield of 1.6% and 7.5% expected annual growth in earnings provide some passive income mixed with a lukewarm outlook. All told, value investors may wish to add some shares in Equitable Group to bulk out the financials section of their portfolios.
Losses of 9.65% in the last five days at the time of writing continue a generally downward trend in share price, leaving this dividend-free ticker a bit of a head-scratcher. Generally healthy and definitively undervalued, Canfor should be a decent buy, though its general downhill momentum since last June is discouraging. Those bullish on 2019’s economic outlook for the lumber industry may take an opposite stance, however.
Trading with a 44% discount and low multiples (see a P/E of 5.1 times earnings and P/B of 0.9 times book), it’s certainly good value, and with low debt at 17.5% of net worth and positive one- and five-year average past earnings growth rates, it’s a healthy stock with a solid track record.
Martinrea International (TSX:MRE)
Primarily an auto parts stock, Martinrea International does what it says on the tin, offering geographical diversification (and thereby some modicum of sturdiness) to a long-term portfolio. One of the top auto stocks on the TSX index, a decent track record is shown by solid one- and five-year past earnings-growth rates of 14.2% and 34%, respectively.
With a decent amount of inside buying over the last 12 months, Martinrea International is trading at book price with a low P/E of 5.9 times earnings. It pays a dividend yield of 1.47%, meanwhile, and is looking at a moderate 12.8% expected annual growth in earnings.
Celestica currently trades with a P/E of 13 times earnings and P/B of 0.9 times book. However, while decent valuation is in evidence, and a 17.9% expected annual growth in earnings shows a positive outlook, Celestica has seen negative one- and five-year average past earnings-growth rates as well as some inside selling in the last three months, along with a smattering of the same through 2018. A capital-gains play in the electronics space, investors may want to bet that Celestica has hit the bottom and get in while it’s cheap.
The bottom line
While Celestica and Equitable Group are moderate buys, Martinrea International emerges as the strongest buy out of this list, with a decent track record, positive outlook, and some passive income. Canfor is a sturdy forest products stock that comes with some built-in geographical diversification, meanwhile, making for a solid stock to build with in one of Canada’s strongest resource-based industries.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.