National-Oilwell Varco, Inc. (NOV), The Dow Chemical Company (DOW): Finding Undervalued Stocks in the S&P 500

Well, firstly it would appear that the world renowned The Dow Chemical Company (NYSE:DOW) is actually one of the cheapest companies in the sector right now. Dow currently trades at a low TTM P/E of 14.6 and P/B ratio of 2.3, both of which are below the sector average. In addition, the company offers investors a dividend yield of 3.9%. However, The Dow Chemical Company (NYSE:DOW) does trade at a price-to-free-cash-flow ratio of 154 –way above the sector average.

Elsewhere, Eastman Chemical Company (NYSE:EMN) currently looks expensive, trading at a TTM P/E ratio of 20.3 – although still below the sector average. That said, the company is trading at a forward P/E ratio of 10, a P/B ratio of 3.5 and a price-to-free-cash-flow ratio of 61, all below the sector averages. However, the company only offers investors a 1.7% dividend yield, about 1/3 below the sector average.

Both The Dow Chemical Company (NYSE:DOW) and Eastman Chemical Company (NYSE:EMN) have the lowest forward P/E ratios in the sector, and despite their low valuations, their earnings are expected to grow rapidly over the next few years:

Conclusion

Although the market may seem overvalued and uncertain to some investors right now, by using the most simple of valuation methods, it is possible to identify some stocks that are still undervalued in relation the rest of their sector. The Dow Chemical Company (NYSE:DOW), Eastman Chemical Company (NYSE:EMN), National-Oilwell Varco, Inc. (NYSE:NOV) and Baker Hughes Incorporated (NYSE:BHI) are all trading at discounts to their sector valuations and offer good opportunities for profit as the valuation gap closes. Moreover, each company is strong and is forecast to grow earnings rapidly over the next year or so.

Fool contributor Rupert Hargreaves owns shares of National Oilwell Varco. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco.

The article Finding Undervalued Stocks in the S&P 500 originally appeared on Fool.com and is written by Rupert Hargreaves.

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