3 cheap stocks right now

The S&P/ASX 200 (ASX: XJO) (^AXJO) has risen over 18% in the last year alone, meaning the top stocks in Australia appear to have run their race for shareholders.

However, it’s not all bad news. If you look hard enough (or not even that hard if you look below) you’ll find some stocks are still trading at a premium.

Many investors use different strategies in valuing a company’s stock. Your tolerance to risk and length of time you wish to invest will all impact a decision of whether or not to buy a company. One of my favourite investors and fund managers used a simple but effective formula to determine the value of a stock at any given time.

Below, I’ve used forecasted earnings per share against the current value of the stock to determine whether or not it represents good value to new money entering the market. Of course, it’s not a bulletproof valuation because there are so many other variables which need to be considered.

However, one stock I believe is significantly undervalued is Leighton Holdings (ASX: LEI). Leighton was my top stock for September because not only it is cheaply valued (on a price to earnings of 10), it is Australia’s biggest construction contractor and has diversified earnings throughout the world. In the past month it has been in the media for bribery scandals dating back to 2011 and its share price has fallen 17%.

However it doesn’t have to be a beaten down stock to be cheaply valued. M2 Telecommunications’ (ASX: MTU) transition to organic growth away from its hugely successful acquisitive growth model has been ill-received by investors. However in the next year Morningstar is predicting EPS to grow to 51.6 cents and full-year dividends to grow to 26 cents. Meaning it currently trades on forward earnings of 11.5 and a dividend of 4.4%.

Corporate Travel Management (ASX: CTD) is another stock which may appear expensive at a quick glance. However, the company will likely grow earnings strongly in coming years making the current price tag somewhat expensive for short-term investors but acceptable for those with an eye for the long term.

Foolish takeaway

Investors shouldn’t drive looking in the rear vision mirror. Historical trends provide limited insight into the future prospects of a company, if any. There is more to finding good companies than just dividends, historical trends and earnings ratios.

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Motley Fool contributor Owen Raszkiewicz owns shares in Leighton Holdings. 

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