With the ASX trading on a price to earnings (P/E) ratio of 14.9, there are a significant number of stocks that have a rating below that of the wider index.
However, investors should naturally be aware of potential value traps. This is where a company's share price is cheap for a good reason, such as a poor outlook or concerns surrounding future profitability.
With this in mind, here are three companies that trade at discounts to the wider index and, although the future is not without risk and uncertainty, they appear to be buys at the present time.
Woodside Petroleum Limited
The falling price of oil has hit shares in Woodside Petroleum Limited (ASX: WPL) very hard, with them falling by 10% in the last six months. This means that they trade on a P/E ratio of just 10.6, which is 29% lower than the ASX's P/E ratio and highlights that they are relatively cheap.
In addition, Woodside Petroleum remains financially sound and, as such, has capital to engage in takeover activity, as seen with its $4.6 billion purchase of two liquefied natural gas (LNG) projects in Australia and Canada from Apache.
This apparent contrarian position (buying assets when other resource companies are generally looking to offload) could increase Woodside Petroleum's long term profitability and help to push investor sentiment higher as we progress through 2015. As such, Woodside Petroleum seems to be a bargain buy.
Macquarie Group Ltd
Also trading at a discount to the ASX is Macquarie Group Ltd (ASX: MQG), with it having a P/E ratio of 14.2. That's only a discount of 5% compared to the wider index, but when the company's growth prospects are taken into account, the valuation gap widens in Macquarie's favour.
For example, with earnings forecast to grow at an annualised rate of 10% over the next two years, it equates to a price to earnings growth (PEG) ratio of 1.42, which is 28% lower than the ASX's PEG ratio of 1.96.
In addition, Macquarie has considerable exposure to international economies, which could give the company's bottom line a boost should the Aussie dollar continue to weaken (which seems likely given the fact that interest rates will probably fall this year). Furthermore, if lower interest rates stimulate investor sentiment and push the ASX higher, then a beta of 1.14 means that Macquarie's shares should rise by 1.14% for every 1% increase in the wider market.
Australia and New Zealand Banking Group
While the earnings growth rate of Australia and New Zealand Banking Group (ASX: ANZ) is forecast to slow considerably following an impressive period of increases, shares in the bank could still be worth buying.
That's because they trade on a P/E ratio of just 12, which is 19% lower than the ASX's rating. This indicates that there could be scope for an upward rerating – especially when the wider banking sector has a P/E ratio of 14.1.
Certainly, profit growth forecasts of 2.9% per annum over the next two years are hardly exciting (especially given that ANZ had recorded annualised growth in its bottom line of 9.8% in the previous five-year period), but with a dividend yield of 5.7% (fully franked), ANZ could deliver a sound income return to go alongside the possibility of an upward rerating during the course of 2015.
