34 shares that look cheap compared to the market

34 shares that could be cheap in 2016.

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One of the easiest ways for investors to value shares is the humble price-to earnings ratio (p/e).

While no single metric should be used in isolation, historically shares bought at low price-to earnings ratios afford higher earnings yields than shares bought at higher ratios of price-to-earnings. The earnings yield is the yield which shareholders would receive if all the earnings were paid out as a dividend.

First, we want to know where the overall Australian share market is right now in terms of value, and for that we look at the market p/e, which is currently around 16.

Next, we compare the current market p/e to historical p/e’s for the market to tell us whether the market is relatively cheap or expensive.

If you take a quick look at the chart below, you can see that a market p/e of 16 is around average for our overall share market (blue line).

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So, now we know that the share market is currently around its average p/e.

Next, we want to compare shares with the average price-to-earnings ratio in their individual sectors. This like-for-like comparison provides a great indicator of whether companies are cheap or expensive relative to their index. For the purpose of this analysis, I’ve focused on large-cap companies only.

Here are 34 shares that are currently cheap relative to their indices. Note that the data for the p/e ratios is taken from Commsec data feeds or the companies’ reports.

Consumer Discretionary Sector

The current average price-to-earnings ratio for the Consumer Discretionary sector is 19.75.

There is currently one large cap share that’s cheap compared to the average sector p/e ratio:

Consumer Discretionary Index p/e P/E
Crown Resorts Limited (ASX: CWN) 19.75 18.77

Consumer Staples Sector

The current average price-to-earnings ratio for the Consumer Staples sector is 19.50.

There are currently three large cap shares that are cheap compared to the average sector p/e ratio:

Consumer Staples Index p/e P/E
Wesfarmers Ltd (ASX: WES) 19.50 18.95
Coca-Cola Amatil Ltd (ASX: CCL) 19.50 16.70
Woolworths Limited (ASX: WOW) 19.50 12.27

Materials Sector

The current average price-to-earnings ratio for the materials sector is 19.10.

There are currently five large cap shares that are cheap compared to the average sector p/e ratio:

Materials Index p/e P/E
Rio Tinto Limited (ASX: RIO) 19.10 17.32
Amcor Limited (ASX: AMC) 19.10 16.75
BHP Billiton Limited (ASX: BHP) 19.10 16.55
James Hardie Industries PLC  (ASX: JHX) 19.10 15.73
Incitec Pivot Ltd (ASX: IPL) 19.10 13.15

Industrials Sector

The current average price-to-earnings ratio for the Industrials Sector is 23.51.

There are currently five large cap shares that are cheap compared to the average sector p/e ratio:

Industrials Sector Index p/e P/E
Asciano Ltd (ASX: AIO) 23.51 23.05
Brambles Ltd (ASX: BXB) 23.51 20.72
CIMIC Group Ltd (ASX: CIM) 23.51 17.8
Qantas Airways Limited (ASX: QAN) 23.51 15
Aurizon Holdings Ltd (ASX: AZJ) 23.51 13.42

Healthcare Sector

The current average price-to-earnings ratio for the Healthcare Sector is 25.76.

There is currently only one large cap share that is cheap compared to the average sector p/e ratio:

Healthcare Sector Index p/e P/E
Sonic Healthcare Limited (ASX: SHL) 25.76 20.77

Financials Sector

The current average price-to-earnings ratio for the Financials Sector is 16.71.

There are currently fourteen large cap shares that are cheap compared to the average sector p/e ratio:

Financials Sector Index p/e P/E
AMP Limited (ASX: AMP) 16.71 15.63
Macquarie Group Ltd (ASX: MQG) 16.71 15.49
Commonwealth Bank of Australia (ASX: CBA) 16.71 14.51
Suncorp Group Ltd (ASX: SUN) 16.71 13.11
Westpac Banking Corp (ASX: WBC) 16.71 12.31
QBE Insurance Group Ltd (ASX: QBE) 16.71 12.3
Lend Lease Group (ASX: LLC) 16.71 12.13
Vicinity Centres Re Ltd (ASX: VCX) 16.71 11.7
National Australia Bank Ltd (ASX: NAB) 16.71 11.29
Mirvac Group (ASX: MGR) 16.71 11.24
DEXUS Property Group (ASX: DXS) 16.71 10.72
Stockland Corporation Ltd (ASX: SGP) 16.71 10.54
Australia and New Zealand Banking Group (ASX: ANZ) 16.71 9.34
Goodman Group Pty Ltd (ASX: GMG) 16.71 9.11

Information Technology Sector

The current average price-to-earnings ratio for the Information Technology Sector is 23.33.

There are no large cap shares that are cheap compared to the average sector p/e ratio:

Utilities Sector

The current average price-to-earnings ratio for the Utilities sector is 23.84.

There are currently three large cap shares that are cheap compared to the average sector p/e ratio:

Utilities Sector Index p/e P/E
AusNet Services (ASX: AST) 23.84 19.68
AGL Energy Ltd (ASX: AGL) 23.84 14.63
APA Group (ASX: APA) 23.84 13.62

Telecommunication Services Sector

The current average price-to-earnings ratio for the Telecommunication Services is 17.79.

There are currently two large cap shares that are cheap compared to the average sector p/e ratio:

Telecommunication Services Sector Index p/e P/E
Telstra Corporation Ltd (ASX: TLS) 17.79 16.16
Spark New Zealand Ltd (ASX: SPK) 17.79 16.09

As with all analysis, I’m not suggesting that you race out and buy these shares immediately, but use it as a starting point for your investment analysis. Additionally, there are reasons why shares are selling at p/e’s below the average price-to-earnings ratio in their individual sectors. For example a low p/e ratio is often a sign that the market is expecting a company’s earnings to fall. So make sure you do your homework!

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