Stock markets resemble a beauty contest, as Lord John Maynard Keynes once famously observed; and, in the long run, beauty fades and beauty contest losers become winners. That, in essence, is why stocks trading at low price/earnings multiples, as a group produce long-term profits. Studies show that such profits, in time, exceed the gains by portfolios of high P/E stocks.

With the bull market grinding on, it is perhaps a good time to see what the market is leaving behind — stocks trading at low P/E ratios. Many of them also trade at low price/book value ratios, another measure of unpopularity that could become a profit opportunity for your clients.

The accompanying list of 29 stocks trade on the Toronto Stock Exchange at less than 10 times trailing earnings. The list excludes investment companies and similar non-operating businesses, as well as mining companies and smaller petroleum companies.

Nine of the 29 also trade below book value, or their balance-sheet value. Another 10 trade at less than 1.5 times book value, a cut-off point that’s often used to identify bargain stocks.

Two have negative shareholders’ equity — a number that swells to seven when you compute tangible book value (shareholders’ equity minus intangibles and goodwill on the balance sheet). For the most conservative valuations, tangible book value is the preferred number.

This last group, of course, are “value” stocks, as opposed to “growth” stocks. In the great bull market that ended 10 years ago, growth definitely occurred and investing by using the value metrics of low P/E and P/BV was unsatisfactory. We no longer have a secular bull market, but a cyclical bull market — and it’s argued that value investing works better in this type of environment.

Expecting long-term growth in a cyclical bull market may also lead to unsatisfactory results, because “long term” is much shorter than you would expect. That is the contention of Robert Haugen of the University of California, whose research supports value investing as less risky and more profitable than holding portfolios of high P/E, high P/BV stocks.

An added positive feature of value investing is the lower average volatility of those stocks, Haugen found. The risk/return relationship is turned upside down, he says, partly because the market overreacts to growth stocks.

Just being cheaply priced is no guarantee of risk avoidance or success in buying such stocks. It’s best to have an indication of progress, in the form of a rising stock price or rising earnings — or both.

Another check for risk is balance-sheet strength, measured here by shareholders’ equity as a ratio of total assets. A ratio below 0.5 is unfavourable, which covers half the stocks on the list. IE