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.

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  1. Claire jodoin | June 4, 2013

    Buying JOY because the PE ratio is very low happears to be a very bad idea for now.
    The stock is below it's falling MA of 200 days and is on the verge of breaking support around $50. Next level of support is well below that. I would recommend patient investors wait till the MA turns to the upside….

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