Stock valuations as attractive as they have been in years

The S&P 500 has recently been near where it was in December 1998. But during this stagnant period, its component companies’ earnings more than doubled. Thus, some stocks are as cheap as they’ve ever been. Here are some:

• Apple (Nasdaq: AAPL) shares have actually been on fire, more than quadrupling over the past five years. But its earnings have jumped more than tenfold. Apple now trades near the lowest valuation it’s seen in more than 10 years.

• Wal-Mart (NYSE: WMT) shares increased all of 2.5 percent over the past decade. During that time, its earnings grew by nearly fourfold. Wal-Mart’s P/E ratio is close to the lowest it’s ever been. Between dividends and share buybacks, cash returned to shareholders provides a yield of 7.5 percent, or almost four times that of 10-year Treasury bonds.

• Intel (Nasdaq: INTC) has a dominant presence in desktops, laptops and servers. Throw in a 3.3 percent dividend yield and a P/E ratio near 11, and you have an attractive valuation.

• Berkshire Hathaway (NYSE: BRK-B), Warren Buffett’s company, owns a wide range of companies related to insurance, homes, jewelry, transportation, apparel and much more. With a recent price-to-book value of just 1.15, shares of Berkshire are at a significant discount to their normal value.

The Motley Fool owns shares of all four companies, and its newsletters have recommended them as well.

Ask the Fool

Q: What’s behavioral economics? – J.O., Greensburg, Pa.

A: It’s a fascinating field mixing psychology and economics and exploring how we often don’t act in rational ways.

For example, in “Why Smart People Make Big Money Mistakes and How to Correct Them” (Simon & Schuster, $15), Gary Belsky and Thomas Gilovich present this scenario:

You’re in a furniture store and you want to buy a $100 lamp. It’s on sale for $75 at a store five blocks away. Do you walk the five blocks to save $25? You also want to buy a dining room set priced at $1,775. Five blocks away, it’s selling for $1,750. Do you walk the five blocks to save $25?

Oddly enough, even though the same amount of savings is at stake, people are more likely to walk five blocks for the lamp than for the dining room set.

This irrationality extends to our investing, too, such as when we leave money in a losing stock in the hope of eventually getting our money back, instead of simply moving the remaining funds to a more promising stock.

There are many great books on the topic, such as “Predictably Irrational” by Daniel Ariely (Harper Perennial, $16).

Q: How can I tell if a company is owned by another company? – T.R., Appleton, Wis.

A: Call and ask its investor relations department, or visit its website and look for a link titled something like “About Us,” “Company Profile” or “Our History.” A Google search might also work.

You may be surprised which companies are related. Yum! Brands, for example, owns Taco Bell, Pizza Hut and KFC. Warren Buffett’s Berkshire Hathaway owns Dairy Queen, Fruit of the Loom, GEICO and many others.

My dumbest investment

My dumbest investment was in an oil project. It was supposed to get great returns – right! I collected money from it for six months, and then the company went bankrupt after the well dried up. The second well is still sitting there, ready to go, and no one is willing to take the oil. Go figure. – B.M., online

The Fool responds: First off, be wary of investments that offer promises: Most carry some risks, and they may be much riskier than you think. Don’t buy based on hopes or rumors. A company may be working on a promising cure for cancer, but that might not pan out or get approved by the FDA.

Be careful with any company that’s too dependent on any source of revenue, too, such as just one or two oil wells. Companies dependent on electronic components from Japan suffered after the earthquake and tsunami. If a sugar company sells most of its sugar to Hershey, it’s vulnerable. Hershey may hit a rough patch, or may simply start demanding lower prices. Favor companies with proven revenue, ideally from diverse sources.