Purchasing stocks at the right time can maximize your return on investment, especially if you plan to buy and hold shares toward a short-term or medium-term financial goal. A stock’s P/E ratio can give you an immediate idea of whether a stock is trading at, below or above fair value.
While the average P/E ratio varies by industry, most analysts consider a stock with a P/E ratio below 25 to be potentially undervalued by the market.
As the S&P 500 comes off its worst trading week of the year, a few of the index’s biggest names are showing rare low P/E values. Let’s take a look at four companies trading in the S&P 500 with P/E ratios that may indicate buying opportunities.
Merck & Co. Offers a Billion-Dollar Market Cap, Sub-15 P/E Ratio
[content-module:Forecast|NYSE:MRK]U.S.-based pharmaceutical giant Merck & Co., Inc. (NYSE: MRK) took a sharp hit to its share price in late February, trading near a 52-week low price of less than $90 per share. When combined with its $1.72 EPS and $226 billion market capitalization, Merck & Co. currently carries a competitive P/E ratio of 13.28.
Analyst estimates indicate that stock experts generally agree this slump in share price is a temporary phenomenon. The company maintains a Moderate Buy rating, with an anticipated potential upside of 30% from its current trading price. Short interest trends support this assertion, with interest rates falling by more than 13% since last month. Signs could point to a rebound for MRK coming soon when combined with increasing institutional investments.
Verizon Communications Brings Rock-Bottom P/E Ratio, Strong Dividend
[content-module:DividendStats|NYSE:VZ]Another stock that’s had a rough year in terms of share price, Verizon Communications (NYSE: VZ) has seen just an 8.3% increase in share price since last year. Despite this, analysts predict a 6.66% potential upside and expected earnings growth of 3.62% at the same time. This gives Verizon a P/E ratio of 10.44, which is considered exceptionally low compared to other telecommunications stocks.
This lower per-share trading value could be related to insider sales activity. In the last three months, insiders have sold more than $2 million in stock. However, institutional activity tells a different story; institutional investors purchased $7.4 billion in VZ stock last quarter compared to $3.32 billion sold.
Value investors looking for long-term income-generating stocks may be particularly interested in exploring Verizon while its P/E ratio is low. The company offers a 6.27% dividend yield, which is competitive with top income-generating sectors like REITs and energy. It also has a 20-year history of dividend increases, making it a strong pick to keep up with inflation.
Exxon Mobil Generates a Strong Potential Upside, Increasing Earnings Growth
[content-module:Forecast|NYSE:XOM]With a Moderate Buy consensus rating and a 17.43% anticipated upside, analysts are expecting a big year for Exxon Mobil (NYSE: XOM). However, what analysts expect from EPS data is even more impressive than price estimates. Analysts predict a massive 21.40% increase in earnings from the company through 2025 despite missing its most recent earnings estimate by $0.10 per share.
While XOM’s share price is higher than the other picks on our list, at about $110 per share, the company still maintains a competitive P/E ratio of 14.04. Insider buying beat out selling, with $14 billion in shares bought versus $9.52 billion sold, another indicator of increasing analyst confidence.
Exxon Mobil can be another strong long-term hold for dividend investors looking to generate long-term, stable income through retirement. While its dividend yield is lower than Verizon at 3.60%, Exxon Mobil has increased its dividend payment for the previous 42 years for an annualized three-year growth rate of 3.24%. This predictable, consistent annual dividend increase of about 1% can mean good things long-term for investors.
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