What are currently the cheapest stocks in the S&P 500? That’s a great question that I recently received. I decided to tackle this question using two simple and crude tools in the value investor toolbox, the price to book value ratio and the current ratio.
The price to book (P/B) ratio has been a favorite of value investors since the day’s of Benjamin Graham. However, often we find that stocks with low P/B ratios are cheap because those companies are financially distressed. What if we could control for financial distress and instead focus on companies that are cheap relative to their equity value? We can do this by using another of Ben Graham’s favorite ratios, the current ratio. The current ratio is simply a company’s current assets divided by current liabilities. Graham required at least a current ratio above 1.5.
Here are the results of a quick screen I ran for stocks on the S&P 500 that have a current ratio greater than 1.5 and then sorted by P/B from lowest to highest:
Liquid S&P 500 Stocks with the Lowest Price to Book Value
|NRG Energy, Inc.
|Constellation Energy Group, I
|Legg Mason, Inc.
|Duke Energy Corporation
|Computer Sciences Corporation
|Molson Coors Brewing Company
|Valero Energy Corporation
|Time Warner Inc.
(Data source: StockScreen123)
Does this stock screen really pick the cheapest stocks on the S&P 500? The top ten stocks from this screen returned an annualized return of 15.3% versus 1.25% for the S&P 500 from March 31, 2001 to present with a one year holding period based on the results from StockScreen123. However, if I don’t include the current ratio filter, the screen only barely outperforms the S&P500 with 1.9% annualized return. While I’m not sure that this simple screen picks the absolutely cheapest stocks on the S&P 500, it sure seems to do a fairly good job at finding some value opportunities. What do you think? Share your thoughts in the comments section below.