Back in May 2012, we discussed 5 companies trading on very low P/E ratios, which suggested they were cheap.
Several studies done over many different time periods have more often than not shown that companies trading on low P/E ratios consistently out-perform high P/E stocks. Therefore a low P/E ratio can be a useful indicator that a company is trading at a cheap price. That's not always the case, and some companies could be a value trap. So let's see how those stocks have performed over the last 18 months.
United Overseas (ASX: UOS) is a property company focused on Malaysia and was trading at 38 cents back in May 2012. The shares are currently changing hands at 55 cents, so we've seen capital gains of around 45%, and the company is paying a dividend yield of 4.6%. The P/E ratio now stands at 5.9 and the price to book ratio indicates that the company is also trading below its book value, so it seems the market has failed to catch on that this stock still appears cheap.
AMA Group (ASX: AMA) owns and operates a number vehicle smash repair businesses and also sells automotive accessories. The company's shares were priced at 13.5 cents when we wrote about the stock back in May 2012, equating to a P/E ratio of just 4.2. Today, the shares have increased by around 178% to trade at 37.5 cents, while the P/E ratio now stands at 11.9. AMA Group still appears to be on the cheap side, and worthy of adding to your watchlist.
TFS Corporation (ASX: TFC) owns and operates sandalwood plantations in Western Australia. Sandalwood timber products can trade for more than $110,000 a tonne, so this is some expensive firewood! Of course, sandalwood oil is mostly used as an essential product in perfume and beauty products, while the wood is used to make furniture, soaps and as a product in the perfume industry.
TFS still looks cheap, currently trading on a lowly P/E ratio of just 3.8, with the share price at 76.5 cents, a rise of 59% since May last year. TFS has only just begun to harvest its first Sandalwood trees, and while there's no certainty over what price the company will receive for the wood, one analyst has estimated the company could generate up to $2 billion of operating profit in the next fifteen years. One to add to the watchlist.
Regional Express Holdings (ASX: REX) operates regional flights around Australia. The share price has gone virtually nowhere since May 2012, with Rex hit by issues such as the carbon tax as well as volatile exchange rates. Despite that, the shares still look cheap trading on a P/E ratio of just over 8, although the company paid no dividends last year. With the current government aiming to get rid of the carbon tax, that could be a catalyst to see an improvement in the share price. Rex has announced that it will spend $50 million this financial year, to buy 25 new aircraft plus other infrastructure, which is expected to add $10 million in additional cash flow per year. The majority of fund will come for the company's existing cash balance. Rex is also one to keep on the watchlist.
Devine (ASX: DVN) is a property development company and was trading around 60 cents back in May 2012. Shares are now changing hands at $1.00, for a 61% gain. But that's where the good news appears to end. The company expects to report a loss of around $15 million for the six months ending December 2013, and has also announced an impairment of around $70 million to its development assets. Devine says trading conditions are challenging, and it was looking to sell down a number of assets. The company expects to report an underlying pre-tax profit of between $7 and $10 million in calendar year 2014.
An investment across all five stocks would have seen substantial returns over the past 18 months, with 4 out of the 5 stocks beating the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) return of 26%. What's more, some of them still appear cheap and may have more life left in them.