One of the classic ways of valuing a stock is calculating its
price-to-earnings ratio , which measures the price of the stock in relation to the company's net income per share. The lower the P/E ratio, the better the buy. The P/E ratio is used along with other financial metrics to determine the valuation of a company compared with its competitors and the overall industry. Because Warren Buffett is one of the most successful investors, Stockpickr decided that it would be useful to review all of his stocks and break out the stocks with the lowest P/E ratios. The Warren Buffett stock with the lowest P/E is USG ( USG), a building materials distributor with a P/E of 8.8. The company is scheduled to report third-quarter earnings today. The stock, which happens to have the highest short ratio of all of Buffett's stocks -- 13.7 -- has a P/E-to-growth (PEG) ratio of 2.6. USG is also owned by the "other Oracle of Omaha," Wally Weitz, who manages the Weitz mutual fund family, which follows a value-disciplined approach to investing. Weitz also owns UnitedHealth Group ( UNH), which has a P/E of 15, and insurer American International Group ( AIG), which has a P/E of 10.6. Another low-P/E stock that Buffett holds is Bank of America ( BAC), with a P/E of 10. The company just last week reported a 32% drop in third-quarter earnings on a revenue drop of 12%, due to unfavorable results of its investment bank unit and higher consumer credit costs. The stock has a PEG of 1.4 and a yield of 5.1%.
BofA is also a favorite of David Dreman, the famous contrarian Forbes columnist. He is also manager of the Dreman Large Cap Value Fund, which has generated an average annual return of 17%, and the Dreman Small Cap Value Fund, which has returned 16.5% a year, on average, for the past 16 years. Dreman also likes tobacco giant Altria Group ( MO), which has a P/E of 14, and Freddie Mac ( FRE), which has a forward P/E of 10.8. Torchmark ( TMK) is another low-P/E stock that Buffett also owns; it offers a P/E of 11.7. This life and health insurance company just reported a 10.2% earnings-per-share increase and a 3.1% increase in revenue. The stock has a PEG of 1.3 and a yield of 0.80%. Torchmark is in the portfolio of Tweedy Browne, a $13.5 billion investment partnership that specializes in value investments. Tweedy Brown also owns shares of financial services firm Lloyds TSB Group ( LYG), which sports a P/E of 10, and SK Telecom ( SKM), a South Korean wireless company with a P/E of 13.7. Check out Stockpickr for the rest of the Top Warren Buffett Stocks by P/E Ratio as well as for the entire Warren Buffett portfolio, which includes his long-held positions such as Coca-Cola ( KO).