One of the commonest and simplest ways to determine if a stock looks "cheap" or not is by looking at its price/earnings (P/E) ratio, this shows how much you are paying for each dollar of a business' earnings.
The lower the ratio, the more earnings you are able to buy.
Sometimes a P/E ratio can be deceptive; if a share price drops, the ratio reduces but if there's a subsequent fall in earnings then the ratio increases. The stock wasn't good value.
As Warren Buffett once said, "price is what you pay, value is what you get".
Here are two stocks with low P/E ratios and high dividend yields.
Crown Resorts Ltd (ASX: CWN)
The recent employee arrests in China have been quite the scandal for Crown so far. It's had a big effect on the share price – down 17% in 11 days. Consequently, this has reduced the P/E ratio to 8.21 (source: Google Finance).
What does this mean for the future of VIP gaming revenue? I'm not sure, but it seems to only be aimed at Chinese VIP gamers. Perhaps the share price has been hit too hard.
Crown has a lot of different projects in the works that could substantially raise profits in the long term.
In situations like this it's hard to say if this is a short term problem; if it is then it could be a good time to buy. If this issue affects the earnings materially, there may still be a lower share price to come.
With a partially franked dividend yield of 6.78%, it's the highest yield Crown has traded at in a few years (assuming it pays the same dividends over the next 12 months).
Until we see the results of these arrests, it may be worth staying on the sidelines for the cautious investor.
Vicinity Centres Re Ltd (ASX: VCX)
Vicinity is one of Australia's biggest shopping centre businesses, with a market capitalisation of $11.7 billion.
The 50% stake in Chadstone shopping centre is the jewel in its crown, though it owns many other centres around Australia.
Bricks-and-mortar retail gets more competitive every year, but as long as Vicinity has centres full of tenants then it may not be affected as much.
There are two key dangers in the short to medium term for Vicinity.
The first is that it's quite sensitive to interest rate increases as an expense and as a threat to its share price. Watch out for potential downward pressure after the Fed's meeting in December.
The second danger is when Amazon finally sets up in Australia. Amazon has changed the face of retailing in North America and Europe – it could do the same here.
The SMH recently reported that Amazon is looking at potential sites for its warehouse. The most likely place is Goodman Group's (ASX: GMG) Oakdale site; it has the warehouse size Amazon would need and Goodman is Amazon's main landlord globally.
If Amazon do set up shop in Australia, some of Vicinity's main tenants could be affected such as JB Hi-Fi Limited (ASX: JBH).
Vicinity has a P/E of 12.21 and a trailing dividend of 5.98%. It isn't as cheap Crown, but it doesn't have the same immediate uncertainty surrounding it.
Foolish takeaway
Foolish investors should always be wary of companies that are trading "cheaply". The share price is normally the first to drop in anticipation of a bad result. If the earnings do drop, the ratio subsequently increases – making that stock no longer cheap.
Of course, Foolish investors could pick up a good deal if a dip in the share price and P/E ratio is only temporary.
Out of the two above stocks, I think Crown is the better buy right now, as it has the better long term future. Crown has a large pipeline of projects and the share price may have hit its lowest point from the Chinese problem.