Whilst it's uncommon for the majority of publicly-listed shares to be significantly mis-priced, market prices are usually indicative of investor expectations.
For shares of iron ore miners, which currently appear cheap using conventional valuation metrics, the expectation is for further price falls in the near future.
The three largest iron ore miners: Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are perfect examples.
Currently they trade on price-earnings ratios of 10, 14 and 5, respectively.
That compares to the broader S&P/ASX200's (ASX: XJO) (Index: ^AXJO) average price-earnings ratio of nearly 17!
Obviously, investors aren't falling over themselves to buy shares of Australian iron ore miners.
Digging a little deeper, however, it's easy to see why they're all so cheap.
Iron ore – a commodity product used in the steel making process – has been sold off heavily during the past four years.
Down from over $US180 per tonne in 2011 to below $US55 per tonne today, the depressed iron ore price is slowly rippling through Australia's miners and economy.
Rio Tinto, Australia's leading iron ore miner, has an incredibly low breakeven price but even it will be adversely affected by the falling spot price.
Indeed, if China – which consumes two-thirds of the world's production – continues to slow (which appears likely) Rio's huge profit margins will be a thing of the past.
As I wrote earlier this month, in 2014 iron ore accounted for almost 50% of revenue and over 90% of Rio's profits.
With prices of many of its key commodities falling, now is not the right time to add Rio's shares to your portfolio.
