Reports have surfaced in the past few months about how the Standard & Poor's 500 is offering the lowest-priced stocks in years based on price/earnings ratios.
Bloomberg in March reported that companies in the S&P 500 were trading at 14.1 times earnings, the lowest valuation of all 34 peak periods since 1989.
Then in May former U.S. Federal Reserve Chairman Alan Greenspan declared that "stocks are very cheap."
Again just last week Bloomberg noted that the S&P 500 is trading 16% below its average valuation since the 1950s.
Now, after the S&P 500 recorded its best June since 1999, investors want to know if it's still the time to buy or if the party's over. With the Eurozone debt crisis still looming and a spate of recent gloomy U.S. economic reports, market optimism has thinned.
But there are still bargains to buy.
How to Find Cheap U.S. StocksFirst, to determine if a stock is undervalued with high profit potential, and not cheap and going nowhere, investors need to scrutinize the driving factors of why a stock's price has fallen.
For instance, you must look at what's happening to the stock's sector - is there a macroeconomic or cyclical reason for the stocks to slip?
Then look at the company - is it in healthy financial shape? What are its future prospects?
Some stocks like Bank of America (NYSE: BAC) may seem undervalued when looking at tangible value, which tells us BAC is worth almost double what it is trading at now. But the company posted negative earnings per share last quarter. Analysts expect it to post a positive EPS of 16 cents this quarter and give it a forward P/E just above 8, which is cheap - but it's a stock that comes with a lot of volatility, so its low price is risky.
Others have had a long slide and may be at a bottom, such as tech struggler Hewlett Packard (Nasdaq: HPQ). CEO Meg Whitman is trying to turn the company around, but HP has lost more than half of its market value over the past year. With its forward P/E less than 5 it seems like a bargain, but there isn't a strong case for why this stock could rally.
And finally look at General Motors (NYSE: GM) or Ford Motor Co. (NYSE: F). Both currently have P/E ratios below 6 and even though the auto industry has been one of the hardest hit U.S. sectors over the past few years it looks to be on the upswing now.