What are some stocks that are undervalued as of the beginning of 2013?

– Hopeful stock picker

A stock is considered ‘undervalued’ if its price is below some fundamental valuation of what the stock is considered to be worth. The fundamental measurements which are often used include earnings. So one way of viewing the most undervalued stock would be to find the stock with the lowest Price per Earnings (P/E) ratio. Given the thousands of stocks in the small and mid-cap range, we might also limit our search to the large cap stock from among the S&P 500.

I’ve written elsewhere that the trailing 12 month P/E ratio can be deceiving, but it is also the most straightforward and least interpreted measurement. So here are a baker’s dozen of large cap stocks listed with their very low 12 month trailing P/E ratios (designated by ttm P/E):

1. 0.01 Berkshire Hathaway Inc. (BRK-B)
2. 2.45 American International Group, Inc. (AIG)
3. 4.13 Seagate Technology Public Limited Company (STX)
4. 4.41 Ford Motor Co. (F)
5. 5.52 Western Digital (WDC)
6. 5.82 Holly Frontier Corp (HFC)
7. 6.06 Yahoo! Inc. (YHOO)
8. 7.17 ConocoPhillips (COP)
9. 7.33 Dell Inc. (DELL)
10. 7.43 CF Industries Holdings, Inc. (CF)
11. 7.73 Delta Air Lines (DAL)
12. 7.97 WellPoint Inc. (WLP)
13. 8.00 The Allstate Corporation (ALL)

While such value stocks tend to out perform the market over long periods of time, there is no guarantee that these stocks will perform well simply because of their P/E ratios. Rather it is always a good time to have a balanced portfolio which has as close to optimum an asset allocation as possible.

Additionally, different measurements of these stocks will show them with different P/E ratios depending on how P/E is measured. Those listed are the trailing twelve month P/E as found on Yahoo! Finance as of January 8th 2013.

We believe that although there is value in tilting toward value stocks, the diversification gained by low cost index funds or exchange traded funds (ETFs) provides an even better value. Even if you believe in index investing, there are over 8,000 indexes from which you can construct a portfolio. And if the best average returns are your goal, Vanguard Mid-Cap Value ETF (VOE) with a ttm P/E of 13 provides a more diversified investment.