The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is currently trading on a P/E ratio of 23.6x according to Bloomberg, which appears incredibly high. Other sources, like the RBA put the forward PE Ratio of the market at around 16x.
Simple theory suggests that looking at companies with P/E ratios under that level should reveal some under-priced securities.
Here are three that look very cheap…
Qantas Airways Limited (ASX: QAN) is currently trading on a trailing P/E ratio of 5.6x and at a share price of $2.77, boasts an ASX 200 record low of 5.1x for the current financial year. The airline has put in a splendid performance over the past couple of years – thanks mainly to the plunging oil price and a strategy by CEO Alan Joyce to slash costs, including an estimated 5,000 jobs.
Unfortunately for shareholders the share price has crashed to 52-week lows recently, as oil prices recovered, consumer confidence has weakened and ultra-cheap international flights have become the norm. Earlier this month we noted that return airfares to the UK or US were available at around $1,000. That makes it very difficult for the airline to make much money.
Given the external issues Qantas faces, it's not one on my radar, despite the cheap price.
Genworth Mortgage Insurance Australia (ASX: GMA) is also trading on a low P/E ratio of 6.1x currently and 5.6x next year's earnings. The lending mortgage insurance (LMI) provider has been hit by a decline in the proportion of high loan-to-valuation ratio (LVR) loans – which is where most of the company's business comes from. Given the tightening of lending criteria, particularly to investors by the banks, that situation could become worse.
For the full financial year, Genworth was forecasting gross written premium to fall by 20%, suggesting there's a very good reason why shares are so cheap.
Flexigroup Limited (ASX: FXL) could be the most hated stock on the ASX. Currently trading for just 1.1x book value and a prospective PE ratio of 6.1x for this financial year (FY16) and 6.3x for FY17, the share price looks very cheap. The finance group – more well known as the provider of those interest-free loans available in many retailers – is forecasting a tough FY17 ahead.
Ignoring the temporary issues, Flexigroup could be the bargain stock of the ASX 200. Particularly so when you consider the shares are on a prospective dividend yield of around 9% – and that's fully franked too.
Foolish takeaway
Qantas and Genworth appear to have more problems that are outside management's control. Flexigroup, on the other hand, is offering a cheap price, an awesome dividend and the potential for some strong capital gains in the next few years. A new CEO is clearing the decks and could refocus the company back on its core strengths.
