The S&P 500 (INDEXSP:.INX) has never been higher; in fact, if you had invested in March 2009 — the Great Recession’s market bottom — you’d be looking at a 150% return in just over four years. That might make you think stocks are too expensive, but if you look at a few individual companies in the S&P 500, that’s not necessarily the case.
One way to measure whether a stock is “cheap” is by its price tag. That’s not the best measure, though; it’s highly influenced by how many shares a company has outstanding. A different metric to use is a company’s price-to-earnings ratio. This tells you how much a stock is worth, relative to how much money its company made over the past year. Right now, the average S&P 500 (INDEXSP:.INX) stock trades for a P/E of 19.3.
But even when we find companies with low P/E ratios, it doesn’t necessarily mean they’re a good investment — these stocks could be trading cheaply for a reason. To dig deeper, let’s investigate the five cheapest stocks in the S&P 500 (INDEXSP:.INX).
5. Yahoo! Inc. (NASDAQ:YHOO), P/E of 7.7
The Yahoo! Inc. (NASDAQ:YHOO) homepage is the fourth-most visited website in both America and the world. Over the past three years, earnings have increased 135%. With numbers like these, you’d expect Yahoo! Inc. (NASDAQ:YHOO) to be trading for higher, but there are two big concerns that have historically held the stock down.
The first is plain old-fashioned competition from the likes of Google Inc (NASDAQ:GOOG). The second has to do with turnover in the executive suite. There have been five CEOs or interim CEOs for Yahoo! Inc. (NASDAQ:YHOO) since co-founder Jerry Yang left in 2009.
However, the company’s newest leader, Marissa Mayer, has been winning praise for finally giving the company a long-term vision. In fact, just this week, Yahoo! acquired Tumblr for $1.1 billion, giving Yahoo! access to a popular mobile platform with a younger generation of users.
4. Western Digital Corp. (NASDAQ:WDC), P/E of 7.5
Western Digital Corp. (NASDAQ:WDC) designs and manufactures data storage devices. The storage devices are used in PCs, Web servers, and network storage devices.
The exact types of devices Western designs are referred to as hard disk drives. Currently, they are in heavy demand to meet the ballooning data storage needs of just about every industry. Revenue and earnings have increased by about 75% over the past three years.
But investors need to beware. It is widely believed that solid-state drives will be the wave of the future — primarily because they have no moving parts. Today, SSDs are too expensive for most customers, but as their prices come down, they could take away Western Digital Corp. (NASDAQ:WDC)’s core HDD business.
