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Bill Gross may be thinking about these stocks

The legendary fund manager says sub-zero yields are pushing investors to ever-riskier assets

Bloomberg News/Landov

Bill Gross says investors should own high-quality bonds and “low P/E, high-quality stocks.”

Bill Gross published his Monthly Investment Outlook for Janus Capital Group today, and it contains a rather dire assessment of the challenge investors face in a world of low interest rates.

After opening the letter with a fun discussion about how people select dogs, including his beloved Golden Retriever Honey, Gross discusses how the U.S. had gained “first mover advantage” by lowering short-term interest rates to near zero late in 2008, and “initiating quantitative easing (QE) policies far sooner than competitors.”

But with Japan delivering its own QE that is “two to three times greater than our own in terms of GDP,” and the European Central Bank ready to begin its own stimulus program, Gross now sees the U.S. advantage turing into a “headwind.” That is because very low interest rates are actually leading to a higher savings rate. “Savers save more, not less, and invest at higher risk levels in order to reach their long-term liability expectations,” he said. And that lowers consumption, which slows economic growth.

Last week, J.P. Morgan Chase JPM, -0.18% said it was looking to trim its balance sheet by as much as $100 billion by charging some large clients fees to take their deposits. And Gross, in the letter, pointed out that 10-year German government bonds are yielding roughly 30 basis points.

The world is awash with cash, and Gross believes “not even ‘thin gruel’ is being offered to our modern-day Oliver Twist investors.”

“You have to pay to come to the dinner table and then sit there staring at an empty plate,” he concluded.

OK, so what’s the bottom line for investors? Gross says you should own“high-quality bonds and low P/E, high-quality stocks if you want to stay out of the doghouse.”

P/E ratios

It’s easy to identify stocks with low price-to-forward-earnings ratios, but taken alone, it can be a dangerous way to pick investments.

A positive forward P/E ratio means analysts expect a company to be profitable. Different industries have different price-to-earnings benchmarks. For example, the S&P 500 Index SPX, +0.61% has a forward P/E — that is, weighted prices divided by weighted aggregate average consensus 2016 earnings estimates, among analysts polled by FactSet — of 15.6 (its highest forward P/E in 10 years). The KBW Bank Index BKX, +1.01% meanwhile, has a weighted forward P/E of just 10.9.

Here are the 10 S&P 500 stocks with the lowest forward price-to-earnings ratios:

CompanyTickerIndustryClosing price - Feb. 27Consensus 2016 EPS estimateForward P/E
Genworth Financial Inc. Class AGNW,-1.09%Life/ Health Insurance$7.75$1.296.0
Ensco PLCESV,-2.86%Contract Drilling$24.47$3.357.3
Micron Technology Inc.MU,-0.64%Semiconductors$30.67$4.197.3
General Motors Co.GM,+0.24%Motor Vehicles$37.31$4.857.7
Delta Air Lines Inc.DAL,+1.95%Airlines$44.52$5.767.7
Prudential Financial Inc.PRU,+1.61%Financial Conglomerates$80.85$10.327.8
Goodyear Tire and Rubber Co.GT,+1.76%Automotive Aftermarket$26.73$3.407.9
Gamestop Corp. Class AGME,-1.01%Specialty Stores$36.97$4.658.0
Metlife Inc.MET,+1.95%Life/ Health Insurance$50.83$6.298.1
Freeport-McMoran Inc.FCX,-2.31%Precious Metals$21.63$2.628.3
Source: FactSet