Stocks may have bounced from their lows and gone lower of late, but there are still many down and out value stocks out there where shares may have been overly punished from the highs and with extremely low valuations.  We wanted to screen out many of the sub-market price-to-earnings ratio stocks to see what was out there for value investors looking to start buying some stocks where the downside seems more limited than in traditional growth stocks.  Merck & Co. Inc. (NYSE: MRK), Eli Lilly & Co. (NYSE: LLY), Exelon Corp. (NYSE: EXC), Northrop Grumman Corporation (NYSE: NOC), L-3 Communications Holdings Inc. (NYSE: LLL), Annaly Capital Management, Inc. (NYSE: NLY), and NewMarket Corp. (NYSE: NEU).

We screened stocks for low P/E ratios, starting with a P/E of under 11 today and an implied P/E ratio of under 10 for the year ahead.  Each HAD to offer a dividend.  A low P/E ratio without a dividend is often a puzzle and can signal that the net earnings at the bottom line are greatly different than the reported earnings from operations.  We also wanted stocks that had sold off more than the broad market ftom highs, which most of these have.  As far as size and trading volume restrictions, we wanted no small-cap stocks and wanted only liquid stocks.  We also wanted to see what the average price target was on each, and that average price target had to be above the current price for the stocks to make the squad cut.

Merck & Co. Inc. (NYSE: MRK) is the largest with a $100+ billion market cap and a price close to $33.65 today, making this down about 19% from the 52-week high of $41.56.  The listed P/E ratio is under 10, and the estimates from Thomson Reuters of $3.39 EPS for 2010 and $3.88 EPS for 2011 give it forward P/E ratios of 9.9 for 2010 and 8.7 for 2011.  This DJIA component also sports a dividend yield of about 4.7%.  Analysts also have an average price target above $43.00 for Merck.  As with all Big Pharma stocks, Merck has political risk in the current climate, has a patent expiration issue along with peers, and has a ‘history’…

Eli Lilly & Co. (NYSE: LLY) may not be a favorite of drug investors and may have patent expiration issues to deal with as well, but its valuations reflect that today.  With shares around $32.75, the stock is down 14% from the 52-week high of $38.00.  The 52-week low is only $32.02, and that may caution many investors with it very close to 5-year lows.  Its current P/E ratio is under 10, and the Thomson Reuters estimates of $4.52 EPS for 2010 and $4.43 EPS for 2011 give this one forward P/E ratios of under 7.5.  No growth here, but dirt cheap.  Lilly now sports a dividend yield of above 6.0%.  Lilly’s average analyst price target today is $37.40.

Exelon Corp. (NYSE: EXC) took the award for power transmission and utility shares with its $25 billion market cap.  At $38.90, the stock is down almost 30% from its 52-week highs.  The recent weakness has shares under a 10 trailing P/E.  The Thomson Reuters estimates of $3.80 EPS for 2010 and $4.09 for 2011 give this one forward P/E ratios of 10.2 for 2010 and 9.5 for 2011.  The dividend yield is also now above many peers at 5.5%.  Exelon’s average analyst price target is $46.23.

Northrop Grumman Corporation (NYSE: NOC) is one of the defense contractors that made the cut. At $60.90, its shares are down are down 13% from the 52-week high of $69.80.  With Thomson Reuters estimates of $6.00 EPS for 2010 and $6.79 EPS for 2011, the forward P/E ratios are 10.1 for this year and almost 9 for next year.  The dividend is above market at 3.10%, but that may feel small for this screen today.  The average analyst price target is right around $70 per share.

L-3 Communications Holdings Inc. (NYSE: LLL) really seems to be in the sweet spot of the defense sector with its intelligence, surveillance, communications, and security operations in a broad portfolio.  At $83.50, shares are down almost 15% from the 52-week high of $97.81.  Its $9.66 billion market cap may not be the largest of the lot, but that is still well above any hurdles for our screening.  With Thomson Reuters expecting $8.27 EPS this year and $9.00 EPS next year, the forward P/E ratios here are 10.1 this year and 9.3 for next year.  That 2% dividend yield also leaves much more room for dividend hikes down the road, and L-3 is well know for dividend hikes.  Analysts have an average price target of nearly $99.00.

Annaly Capital Management, Inc. (NYSE: NLY) is a mortgage REIT and is the big game of shooting craps here in the value arena.  The recent weakness in Europe and the softer economic numbers hitting the U.S. and taking down some heated growth expectations just gave the company (and investors) what feels like a much longer life-line against the risk of any sudden or imminent rate hikes from the Fed, and this gives it lower borrowing costs to keep a high spread on its mortgage (securities) investing activities.  At $17.00, this is down about 14% from the $19.74 high of the last year.  It also has single-digit P/E ratios (or P/FFO) which is why the yield is so high: estimates from Thomson Reuters are $2.64 for 2010 (ratio of 6.4) and $2.76 for 2011 (ratio of 6.15).  As its income varies, the 90% income payout makes the dividend variable.  Depending upon your quarterly calculations, Annally has a double-digit yield.  This one has maybe the lowest upside target from analysts at $18.13, but you have to consider the yield on top of the price.

NewMarket Corp. (NYSE: NEU) is perhaps the biggest unknown in our value screens, and due to its size and volatility we’d throw out that it is not for the faint of heart.  It is the parent of Afton Chemical and of Ethyl Corp. The companies: Afton develops and manufactures petroleum additives that enhance the performance of lubricating oils and fuels; Ethyl provides value-added manufacturing and supply solutions to the chemical industry.  At $104.00, its market cap is almost $1.6 billion and its shares are down 18% from the 52-week high of $126.89.  Its current P/E is under 10, and the Thomson Reuters figures of $11.48 for 2010 and $11.49 give a forward P/E ratio of 9… Its 1.6% dividend yield also leaves great room for future dividend hikes.  The average analyst price target is close to $130 per share, but we would note that the field of analyst covering NewMarket is considerably smaller than the norm.  This is one of those that we would have not ever considered had we not run these valuation screens to see what comes out of the pipe.  Again, this one is the biggest wild card of the lot and does not seem to be for the squeamish.

There were several issues to consider here.  Due to the unknown impact of the coming financial reform, we also took out any bank and insurance company.  Ideally, we might have shied away from defense contractors.  And maybe moved from anything tied to energy.  Those are not the world’s favorite investments in the current political regime.  But after taking a look at the values, these seemed fit for command at the current valuations.  Price snapshots ad valuation calculations were taken during the trading day on Friday.

JON C. OGG

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