3 Ridiculously Cheap, High-Quality Companies

Of all the insights I've heard over these crazy months, the most telling came from an investor who appeared on CNBC last fall and, being entirely serious, advised, "There're only two positions to be in right now: cash, and fetal."

I get it. Even with the recent rally, it's ugly out there. Many companies that overleveraged their balance sheets are permanently impaired and will probably never fully rebound. Banks such as Citigroup (NYSE: C  ) come to mind. We had an unprecedented boom; now we're in the middle of an unprecedented bust. That's how markets work.

Even so, history tells us time and time again that market panics and forced sell-offs indiscriminately throw the good out with the bad. The frenzy over financial markets, coupled with the "sell-now-ask-questions-later" mood of global investors, is providing bargain hunters with the sort of opportunities we haven't seen in decades. 

Using the wisdom of our 135,000-member-strong CAPS community, I've hunted down a few dirt cheap, high-quality companies. Have a look:

Company

Recent Share Price

Forward P/E Ratio

5-Year Expected Growth Rate

Trailing-12-Month Return on Equity

Dividend Yield

CAPS Rating (Out of 5)

Cintas (Nasdaq: CTAS  )

$24.61

12.9

11.8%

9.8%

1.9%

****

Clorox (NYSE: CLX  )

$60.10

14.4

9.7%

N/A

3.4%

****

Johnson & Johnson (NYSE: JNJ  )

$60.92

12.4

8.0%

28.2%

3.2%

*****

Data from Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS, as of July 28.

Let's break down the bullish argument for each one.

When boring is beautiful
I think of uniform giant Cintas the same way I think of Waste Management (NYSE: WMI  ) : so horrendously boring that most refuse to even look at it. Yet the numbers tell a story of a company that knows how to make money hand over fist.

Cintas has been bruised by the recession. But with a stock trading at less than 13 times forward earnings, some are questioning whether the bad news is thoroughly baked in already -- especially when you consider its potential as the market's dominant player. As CAPS member BoiseKen writes: "P/E is right above 12 -- the company has shown previous growth trends around 15%. That gives it a decent PEG coupled with Cintas dependable earnings and I think we have a 5 year winner."

Does employment need to pick up for growth to take off? Well, yeah. But shares are already priced for a flat-lined economy. Any job-market improvement in the years ahead is icing on the cake for patient investors.

Give cleaning products a chance
Add Clorox to the list of boring companies that few care to even look at. This reluctance can be forgiven: Bleach isn't the most fascinating of topics.  

But overlooked is that Clorox is more than bleach. It owns a host of household brands, including Brita water filters, ArmorAll, and STP motor oil.

And it sucks money out of these companies like no one's business. The simple nature and predictability of its business allows Clorox to throw off more cash than it knows what to do with. More specifically, it produces cash that isn't needed within the company, and that cash ends up back in shareholders' pockets by way of buybacks and dividends. As CAPS member lsleGirl2010 writes:

Lots of brand names give it a wide moat. They generate a lot of cash. Once the economy picks up, they should be doing well. Meanwhile, you get paid dividends to wait for sunnier days.

I pulled the trigger
After mulling for several months, I took the plunge and bought Johnson & Johnson. My reasoning was simple and straightforward:

  • It's a conglomerate that actually works. Just like Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) functions, a decentralized management structure allows dozens of individual companies to operate under one roof, rather than having dozens of companies managed by one boss who sits under one roof. This approach allows individual managers to be left alone to do what they do best -- manage their own businesses.
  • The health-care industry makes me feel a lot better than banking, manufacturing, or discretionary spending ever could. Sure, anyone can gab about why he or she thinks health care will fall under the government's iron fist, but I think the ballyhoo is overblown, especially for product-oriented companies such as J&J.
  • It's cheap, at about 12 times forward earnings. In addition, you take home a 3.2% dividend. So you're getting a world-class company at a valuation we would have thought was a typo in recent years.   

Your turn to chime in
Have your own take on any of these companies? More than 135,000 investors use CAPS to share ideas and swap opinions. Check it out and speak your mind. It's 100% free to participate.

For related Foolishness:

Fool contributor Morgan Housel owns shares of Johnson & Johnson and Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Berkshire Hathaway and Waste Management are Inside Value recommendations. Johnson & Johnson and Waste Management are Income Investor picks. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.


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