7 Highly Rated Stocks on Sale

I'm always looking for a good deal, whether that means buying three boxes of Cocoa Puffs when they go on sale or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than it's worth may seem silly, but legendary value investor Benjamin Graham tells us, by way of allegory, how we can look out for these situations.

In The Intelligent Investor, Graham introduces readers to a crazy dude named Mr. Market. Mr. Market's game is to pay you house calls on a daily basis to offer to sell you interests in businesses that he owns, or to buy from you interests in businesses you own. Sometimes Mr. Market will show up at your door very excited and offer you premium prices for your holdings, while at other times he'll be totally depressed about the future and will offer to sell you what he has for as low as pennies on the dollar.

To find some of the stocks that Mr. Market is depressed about, I've turned once again to The Motley Fool's CAPS investor community. Each of the companies below had been given a five-star rating (the highest) by our community of investors just 30 days ago:

As the chart shows, these stocks are all still well-regarded by the CAPS community despite their major underperformance over the past month. While these aren't formal recommendations, they could be a great place to kick off some further research. To get you started, two of the stocks here caught my eye: Palomar Medical Technologies and Actions Semiconductor.

Medical device maker Palomar Medical is in the business of making people beautiful -- and, apparently, scaring the pants off its competitors. Palomar, which uses lasers to perform cosmetic and medical procedures, has shown that it's not afraid to file suit against its competitors for infringement of its patents. Fellow Fool Rich Duprey did an excellent job summing up Palomar's recent quarter and the reasons why that 16% shave might have been a bit too much.

The "stocks on sale" list seems like a strange place to see Actions Semiconductor, especially when the company was rated one of the top 10 of all 3,800 rated stocks on CAPS. Even today, the stock continues to be supported by the CAPS community. It has only one underperform rating -- and that one from a player who just wanted to bet against the crowd!

After being up around $12 per share in the summer of last year, the stock has taken a nasty dive and is currently trading at less than $7. The company is a fabless system-on-a-chip (SoC) semiconductor designer, primarily for the MP3 player market, and it is based in China. Sounds exciting, right? On top of that, the company has consistently been topping analysts' EPS estimates and is trading at a PEG ratio of 0.42.

What investors appear to be grappling with, though, is whether the growth that is projected for the company is really believable. The forward growth rate is a key assumption in a PEG ratio, and though it's always going to be an estimate, if it is significantly wrong, it can mistakenly make a stock look overly cheap (or expensive). Since 2003, Actions has had a "holy cow" annual revenue growth rate of more than 200% and total revenue growth of 2,942%. From 2005 to 2006, though, that revenue growth slowed to about 14%, and current analyst estimates for 2007 show revenue up about 5%.

So where does Yahoo! Finance's 18.8% average growth rate for the next five years come from? I can't quite tell, but if you look at the stock's 7.9 P/E multiple on a 5% or 10% forward growth rate, you've got a stock that suddenly seems more fairly valued. There are other things to like about Actions, such as its healthy free cash flow and its clean balance sheet with a wicked amount of cash, but its future growth may not be what it seems.

So are you with the rest of the CAPS crew or against them? Either way, you can let them know simply by logging on to CAPS. In addition to the seven picks mentioned here, there are more than 3,800 other stocks rated on CAPS and more than 22,000 investors participating in making it a powerful tool for stock research.

For more CAPS coverage:

• 5 More Top Growth Stocks
• 5 Frugal 5-Star Stocks
• The Worst Stocks in Our World

Not on CAPS yet? Fool contributor Matt Koppenheffer says "I pity the fool that ain't on CAPS." He does not own shares of any of the companies mentioned. The Fool's disclosure policy is tougher than BA Baracus himself.