Stock prices have rallied more than 20% in the past 12 months, but it is still possible for investors to find bargains -- if they are willing to do a little research. Investing in underpriced stocks often requires patience, since the expectation is generally for a gradual rise in value. But sometimes these stocks attract the attention of corporate raiders and shoot up overnight. This recently happened with Clorox Corp. (NYSE: CLX). An investor group led by Carl Icahn determined Clorox was undervalued and purchased 9% of the outstanding stock, which resulted in surge of about 9% in Clorox's share price within two trading days. Before Icahn's investment, Clorox shares had been trading for 16 times trailing earnings and yielded more than 3%.
Beginning with a list of some 20 low P/E stocks, I ran a third screen, which narrowed the list further to stocks that also trade at a price/earnings-to-growth (PEG) ratio discount to the S&P 500. PEG ratio measures a stock's value relative to its long-term growth prospects. The S&P 500 trades at a 1.6 PEG ratio, according to recent Thomson Reuters data. I also eliminated stocks trading above their book value as well as stocks that yield less than S&P 500, which currently yields close to 2%.
Source: Street Authority
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