7 Highly Rated Stocks on Sale

I am always looking for a good deal, whether that means buying an extra box of Golden Grahams when they're on sale or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than its worth may seem silly, but legendary value investor Ben Graham (no relation to the cereal) tells us, by way of allegory, how we can look out for these situations.

In The Intelligent Investor, Graham introduces readers to a wacky chap 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 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 inconsolably 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:

Data from Motley Fool CAPS as of July 16, 2009.

As the table shows, these stocks are all still very well-regarded by the CAPS community despite their underperformance over the past month. While these are not formal recommendations, they could be a great place to kick off further research. I'll even get you started with some thoughts on Sterlite Industries.

Why so blue?
Imagine how you'd feel if you bought a cheeseburger at McDonald's and right after you sat down, the manager of the store came to your table and took a bite out of your sandwich. That's a little what it's like when a company dilutes its equity holders by issuing new shares.

Sterlite -- which is primarily a diversified metals play similar to Freeport-McMoRan (NYSE:FCX) and Southern Copper -- saw its stock plummet this week courtesy of a $1.5 billion offering of American depositary shares (ADS) on Thursday.

For a company with a market cap just a hair under $8 billion and shareholder equity of $4.9 billion, $1.5 billion in new shares is no small matter, particularly when the offering is priced 6% below the previous closing price. Investors responded in a big way and sent the shares tumbling 13.5%.

Though dilution is painful, it's always important to consider the purpose of the offering and whether the new capital can help the company grow, so that it may be worth even more down the road. In Sterlite's case, the company said the offering would be used to fund its burgeoning power generation business and acquisitions.

There's good reason to believe that in a growing, power-hungry Indian marketplace, Sterlite's power business could be a big hit for the company. And with stock prices still a bit depressed, maybe Sterlite can find some nice, accretive acquisitions to jump on.

Even so, the equity issuance is a bit of a head-scratcher. The offering price of $12.15 puts Sterlite's price-to-earnings ratio (P/E) at 13 based on analysts' estimates for fiscal 2010 (which ends next March). As the market price of a stock declines, the implied cost of issuing equity rises. While a forward P/E of 13 isn't ridiculously low, it's even harder to argue that it's especially high. In short, this looks like a fairly expensive capital raise for the company.

Meanwhile, Sterlite has a fairly clean balance sheet with almost negligible debt and a big chunk of cash and equivalents. From an outsider's perspective at least, it would seem like a debt issuance would have made more sense.

Sterlite's parent company, Vedanta, bit off a $500 million chunk of the issuance, which at first glance looks like a good sign. Prior to the issuance, though, Vedanta owned more than 50% of the outstanding shares, so buying just a third of the new issuance actually lowers Vedanta's ownership stake.

What the bulls say
The CAPS community has been very bullish on Sterlite, with more than 1,000 members rating the stock an outperformer, versus just 23 who think it will lag the broader market.

Since the equity offering just took place, CAPS members may not have updated their outlooks on the stock yet -- that is, if their outlook has changed. However, it may be instructive to take a look at why Sterlite shares have been such a popular pick.

Back in late 2007, pencils2, one of the top-performing CAPS members, gave Sterlite a thumbs-up and highlighted three points that he thought would help make the company successful:

1. Huge control over various metals will give the company immense opportunity as India's infrastructure rapidly expands.

2. $1.51 billion in cash with $548.41 million in debt; from fiscal 2006 to fiscal 2007 earnings tripled and cash flow production doubled. Production is expanding very quickly as well.

3. Entering the power generation business with good-sized investments (close to $2 billion). The potential in this area in India is enormous and Sterlite has a lot of experience with it.

While the company's balance sheet doesn't look exactly the same as it did back then, it's only gotten stronger. It should also be noted, that pencils2 highlighted a false start in the company's power generation efforts as the primary risk.

But here's the important question: Do you think the recent drop has created a good buying opportunity? Or will the equity offering continue to pressure the stock price? Head over to CAPS and share your thoughts with the other 135,000 members currently part of the community. Even if you'd prefer to pass on Sterlite, you can check out a couple of the other stocks listed above or any of the 5,300 stocks that are rated on CAPS.

More CAPS Foolishness:

• 5 Stocks With a Bright Future
• 3 Stocks That Just Make Sense
• America's Next Top Growth Stock