Don’t look now but the S&P 500 is really inexpensive.

The market is now valued at just 12 times forward earnings. Over the last hundred years or so, price-to-earnings (P/E) ratios have averaged around 15. Right now we’re looking at the lowest P/E since the late 80s! And if you bought stocks then, you were up 16.5% in 1988 and 31.6% in 1989!

S&P earnings are estimated to be $82 this year and $96 in 2011. That gives the market an earnings yield (earnings divided by the index’s value) of 8%. That’s five percentage points higher than the 10-year Treasury note.

According to Oppenheimer strategists Brian Belsky, the gap between treasuries and the market hasn’t been this wide since the late 70s. He also notes that when the gap has been this wide, the average one-year return on the S&P has been 26.7%. Wouldn’t that be nice?

Of course, just because stocks are cheap doesn’t mean they won’t get cheaper. Stocks spent a good portion of the 70s with single-digit PEs. Stocks have lost a lot of their appeal in the last decade thanks to two ugly bear markets.

But any time you see stocks at these levels, it makes sense to start doing a little buying.

Bargain #1

Now is a good time to be looking at energy stocks. World crude oil production has basically flatlined since 2005. And the world has an 80 million barrel a day oil habit that isn’t going away any time soon. In fact it’s a habit that will only grow as the developing world approaches the living standards of the developed world. This chart says it all:

Yet fears of a double-dip recession have taken oil prices to around $75 per barrel. And it has slammed the stock prices of many petroleum giants. In fact, one of the largest oil companies in the world sports a dividend of over 3% and a forward P/E of just 8.2.

The increasing demand for energy is one of those powerful long-term trends that make you money. And the energy sector hasn’t been this cheap in years. In fact, our very own Andy Gordon has identified a major oil producer riding a huge wave of growth in China. You can learn more about this exciting opportunity to cash in on increasing energy demand in Sound Profits.

Bargain #2

Another sector that is unloved is pharmaceuticals. And it’s not hard to see why. Ten years ago this sector averaged a 30 P/E. Today most big Pharma shares have a forward P/E of less than ten. The culprit? Many patents on blockbuster drugs are set to expire over the next few years.

This means generic versions will be available. And that means smaller profits. But our own “breakfast club bandit” Ted Peroulakis has identified a company in this sector with great upside. The company has nearly $10 billion in cash and has an aggressive stock buyback program. It also delivers an attractive yield and a P/E of less than ten.

And Ted isn’t alone in finding bargains in this area. Sound Profit’s Andy Gordon is excited about a company that has been in business for over 100 years. Last year’s sales were over $60 billion. Its dividend has gone up annually for the last 48 years. And the forward P/E on this stock is around 11.

Can Stocks Get Cheaper?

Of course. But with valuations at this level and yields 10 times those of money market funds, it’s time to start buying. Sure the market is choppy. But a lousy market can be your friend.

As the legendary financier Bernard Baruch reportedly said, “there are more millionaires created in bear markets than in bull markets. You just don’t know it at the time.”