A falling stock market often presents opportunities to buy good businesses at prices less than their actual worth. As Warren Buffett famously said, "be fearful when others are greedy and be greedy when others are fearful."
The Australian stock market continues to oscillate up and down. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been acting like a roller coaster since last week. The unpredictable rise and fall in the index is indicative of fear and panic among investors.
To determine which stocks are undervalued and could represent a potential buying opportunity, I have used a set of four financial indicators to compile a list of 10 potentially cheap stocks in today's market conditions.
The four financial indicators are as follows:
- Price-to-earnings ratio (P/E) – The criteria here is to select stocks with a P/E ratio of less than 16.
- Return on equity (ROE) – Only stocks with a return on equity of greater than 10% for the recent financial year are considered.
- Earnings per share growth for the last five years – Only stocks with positive earnings per share for the last five years are considered.
- Drop in price over the last 13 weeks – Only stocks that have dropped in price by more than 5% during the last 13 weeks are considered.
Following is the list of 10 stocks sorted by price to earnings ratio (P/E):
| P/E | ROE | EPS growth last 5 years | Last 13 weeks drop in price | ||
| 1 | Kathmandu Holdings Ltd (ASX: KMD) | 6.08 | 15.40% | 21.46% | -7.07% |
| 2 | Woodside Petroleum Limited (ASX: WPL) | 8.32 | 15.55% | 7.27% | -16.69% |
| 3 | Australia and New Zealand Banking Group (ASX: ANZ) | 10.59 | 15.62% | 14.69% | -11.65% |
| 4 | Lend Lease Group (ASX: LLC) | 12.31 | 12.34% | 8.96% | -13.46% |
| 5 | Ansell Limited (ASX: ANN) | 12.42 | 16.47% | 9.21% | -13.83% |
| 6 | JB Hi-Fi Limited (ASX: JBH) | 13.40 | 42.79% | 4.71% | -13.87% |
| 7 | Flight Centre Group Ltd (ASX: FLT) | 13.99 | 21.67% | 12.86% | -15.80% |
| 8 | Spotless Group Holdings Ltd (ASX:SPO) | 14.58 | 18.67% | 25.70% | -15.53% |
| 9 | SEEK Limited (ASX: SEK) | 14.78 | 27.61% | 25.09% | -25.81% |
| 10 | Perpetual Limited (ASX: PPT) | 15.40 | 21.71% | 4.74% | -24.70% |
Source: Google Finance
Foolish takeaway
Not all of the companies in the above table have been affected solely by market volatility. Some are facing strong headwinds in their industry such as the drop in oil price. Nonetheless, the recent fluctuations have made an additional impact, thus exasperating the share price decline. This is a good opportunity for a Foolish investor to grab some quality businesses at cheap prices.
