We have already looked at the Dow Jones 30 and examined the "cheapest" stocks based on a Prices against 5 year Earnings ratio -- the theory be to look at the long term earning potential of these mamoth companies and see what that turns up. We now expand this to include the S&P 500 -- the biggest 500 companies in the US which will be pretty sizeable concerns and likley to weather the current market storms.

Anand Chokkavelu from the Motley Fool picks up this thread and provides this analysis. He summarizes the target companies --500 of the biggest public companies in the U.S. stock market. It pretty much encompasses all the names you can think of -- Apple, Coca-Cola, IBM, P&G, ExxonMobil, Bank of America, Verizon, FedEx, McDonald's, Johnson & Johnson, Wal-Mart, and Amazon.com, to name a few. It captures around three-quarters of the value of the entire U.S. stock market and includes most of the leading companies with market caps above $1 billion. ExxonMobil's leads the list at $375 billion

He then goes on to outline the 10 lowest five-year P/E ratios in the S&P 500.

Source: S&P Capital IQ. Excludes companies with significant discontinued operations and/or fiscal-year changes.

Anand provides some analysis for the beaten down prices.

• MEMC's profitability on its silicon wafers has plummeted
  
• HP and Western Digital face obselescence and competition
  
• NRG Energy's latest 12-month profitability is less than half of its five-year average
  
• Assurant, Travelers, and WellPoint all face balance-sheet scrutiny in a post-AIG-blowup world, and Assurant and Wellpoint face the uncertainty of future health-insurance regulations.
• Corning faces both potential lower demand for its specialty glass in the LCD TV market and margin compression.
• L-3, like all U.S.-based defense contractors, lives at the mercy of future U.S. government defense budgets
  
• Diamond Offshore is an offshore oil and gas driller. Post-BP's 2010 Gulf oil spill, the drillers have had regulatory concerns priced in.  

So we have the classic bargain hunter's conundrum in front of us. We see very cheap prices but very real risks.

I think that this is a useful filter but as Anand goes on to point out, there is a degree of Caveat Emptor -- which the long term nature of these stocks are that they will find a way to strengthen themselves, there is the risk of buying into a company in long term demise.
However, looking into the bargain bin but only looking for the largest 500 companies in the US, mitigates risk somewhat. We also recall that these giant companies are likely to have global markets which diversifies risk (for good and bad).

So, we will measure this selection of equities against our reference dividend producing ETF portfolio and see what light this shines on building a long term investment portfolio.

Calculate Performance