Two Low P/E Stocks Worth Buying

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One of the most commonly used valuation ratios investors use is the price-to-earnings (P/E) ratio. This multiple tells you how much investors are willing to pay now for each dollar of earnings the company is generating. A company with a high P/E compared to its industry peers is said to be expensive, while a company with a low P/E is said to have value.

Earlier, I went over a couple companies’ stocks that provide good value despite having a high P/E ratio. Now, I’ll take a look at a couple of companies with low P/E ratios that provide good opportunities for growth.

Caterpillar (NYSE: CAT)

Caterpillar currently trades at a P/E ratio of under 9. Historically, the company has traded for 15 times earnings, and the industry trades for close to 14.5 times earnings. Currently well off its 52-week high, the company is very cyclical and tied to the economies to which it has the most exposure – the U.S. and China.

In China, the government is infusing the economy with money, particularly making loans for infrastructure projects. Last quarter, the government sped up the approval process on over $157 billion worth of construction projects. As China’s government continues to create opportunities for growth, and build out its infrastructure, a lot of construction jobs will add to Caterpillar’s prospects.

In the U.S., Caterpillar maintains a 25% market share in construction. In 2013, new housing projects are estimated to reach nearly 1 million. Comparatively, pre-recession we were constructing 1.1 to 1.4 million housing projects per year. Additionally, there is large potential for growth in education, power generation, and highway construction where spending projects have been delayed, but are expected to resume in 2013 and 2014.

I believe at a historically low P/E ratio, Caterpillar does indeed provide good value to investors. By comparison, chief competitor Deere (NYSE: DE) trades for a P/E of 11.2 and CNH Global (NYSE: CNH) trades for 10.2 times earnings. If you can get the industry leader for a lower price, why wouldn’t you? Even the growth outlook for Caterpillar is better than the competition, so the low P/E does not seem justified.

CF Industries (NYSE: CF)

CF Industries currently trades for less than 8 times earnings. That’s well below its historical average P/E of about 11, and the industry average of over 13. This all despite trading near its 52-week high of $227.99.

With the drought that plagued Midwest agriculture production last summer, fertilizer stocks are poised to capitalize on a comeback in 2013. Even with the drought, farmers had record income in 2012, and agriculture analysts expect similar profits in 2013. The main ingredients to successful farming are farm equipment and fertilizer.

CF and its subsidiary Terra Nitrogen (NYSE: TNH) produce nitrogen-based fertilizer – a product that has recently seen its price rising due to higher expected demand and the tight domestic supply of nitrogen. As a result margins are improving, and I expect them to continue to improve. The price increase should provide growth to both the top and bottom line for CF and its subsidiary.

Compared to other fertilizer industry leaders, CF is priced for value. Well-known potash producers Mosaic and Potash are priced at 11.9 and 15.3 times earnings respectively. Agrium which makes all three types of fertilizer – potash, nitrate, and phosphate – is priced at nearly 12 times earnings. Nitrogen-based fertilizer producers have a lot of pricing power right now, and CF is valued very well compared to the heavyweights in other parts of the industry.

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While these two stocks provide good value with low P/E ratios, that’s not always the case. Sometimes, stocks go on sale for a reason. If the fundamentals are bad and there’s very little prospect for growth, that’s not a company I’d be interested in owning. Make sure to do your homework, and find out what’s really going on before throwing your money into every stock with a low P/E.

adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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