How to Find the Best Undervalued Stocks to Buy Now

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When looking for the best undervalued stocks to buy now, you can't just consider those that have lagged the broader market.  

Many companies that are down for the year in what has been a strong stock market have declined for solid reason and the near and intermediate-term outlook is still weak.

While there is a tendency for these undervalued stocks to eventually revert to the mean, you can increase your odds of a successful contrarian investment by selecting those that are also cheap on one important valuation measure.

That's why, when hunting for the best undervalued stocks to buy now, you should not only look at profitable companies, but also underperforming stocks that trade at a very low price-to-earnings ratio. There is a well-documented tendency for stocks with low PE ratios to outperform the broader stock market over longer time periods.

Although there are 30 stocks in the S&P 500 that are down so far in 2013, just three of them trade with single digit PE ratios and might be candidates for a contrarian investment by long-term investors.

Here are the only three stocks to buy now that fit this criteria.

Three Undervalued Stocks to Buy Now

You probably noticed that the lagging stocks so far this year either dig stuff out of the ground or make equipment used to dig out raw materials.

In order for the broad-market advance to continue, the economy is going to have to start showing signs of a strengthening recovery. When this happens, the companies that are close to the raw materials will lead instead of lag the broader markets.

One of these undervalued stocks to buy now is Joy Global Inc. (NYSE: JOY). Joy Global makes mining equipment and has seen a slow down as a result of utilities switching from coal to natural gas in the United States. It's also seen relatively slow growth in emerging economies, most notably China.

The company's products are used in almost all forms of mining including not just coal but copper, iron ore and even oil sands. They make machines used in both surface and underground mining. When the world economy picks up in the next few years and demand for minerals and energy strengthens, so will demand for the machines manufactured by Joy Global. The need for mining machinery in India and China is expected to be particularly strong in the years ahead.

The stock currently trades at just eight times earnings, well below the average earnings multiple in the years prior to the start of the economic crisis in 2009. The company has cut costs to protect profit margins during the slowdown and made acquisitions that leave it well-positioned to benefit in a global economic recovery.

Another industry lagging the market is fertilizer companies.

CF Industries Holdings Inc. (NYSE: CF) is one of the largest fertilizer companies in North America. The company produces phosphates and nitrogen fertilizers for use in the agricultural markets.

As with other companies selling at lower valuations in today's market, the near-term for the company is somewhat constrained by a weak economy.

However, looking at the longer term outlook, the need for food to feed the growing world population will continue to rise over the next decade and this bodes well for the fertilizer companies. Natural gas is the largest part of the cost structure for fertilizer companies. Its relatively low price is giving fertilizer companies a major profit margin boost.

The stock is down almost 7% so far this year and trades at just six times earnings.

The last sector filled with undervalued stocks to buy now has taken a beating this year.

Gold mining has been an uncertain business in the past few months as the metal has been very volatile in 2013. Gold prices have fallen almost 20% in the past year and this has soured sentiment on the gold mining stocks.

Newmont Mining (NYSE: NEM) is one of the largest gold miners in the world with operations in the United States, Latin America, Australia and New Zealand. The company also has copper mines in Indonesia.

Output from its mines should be flat this year, but the company sees increased production from both its gold and copper operations beginning in 2014.

The shares trade at just 9.7 times earnings which is well below the historical average PE ratio for this stock. In addition to being a potential contrarian opportunity, the first sign that global money printing is producing inflation, both gold and the price of Newmont's stock price will shoot higher rapidly.

For more undervalued stocks to buy now with huge profit potential, check out this additional way to measure a stock's value...