3 Ridiculously Cheap, High-Quality Companies

Of all the insight I've heard over these few 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, the economy remains mired in failure. Many companies that overleveraged their balance sheets are permanently impaired and will never fully rebound. AIG (NYSE: AIG  ) comes to mind. We had an unprecedented boom; now we're crawling out of an unprecedented bust. That's how markets work.

Even so, history tells us time and time again that the good gets out with the bad in times like these. Using the wisdom of our 140,000-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

Dividend Yield

CAPS Rating (out of 5)

K-Swiss (Nasdaq: KSWS  )

$9.04

N/A

19%

N/A

***

Johnson & Johnson (NYSE: JNJ  )

$61.16

12.45

7.68%

3.2%

*****

Clorox (NYSE: CLX  )

$58.23

12.65

9.67%

3.4%

****

Data from Yahoo! Finance and Motley Fool CAPS, as of Oct. 19.

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

A closer look at K-Swiss
In the footwear world, K-Swiss might be the antithesis of Nike (NYSE: NKE  ) : In recent years, as much as 70% of total revenue stemmed from just one design, the Classic. Not surprisingly, as fad trends go against the Classic, so goes K-Swiss' earnings power. Indeed, average analyst expectations show the company is expected to lose money for the foreseeable future.

But what K-Swiss does have going for it is a boatload of cash, and essentially no debt. This $9 stock carries $4.60 cash per share. Back out those greenbacks, and what we'll call the "stub company" has a market cap of about $130 million -- not bad for an organization that pulled down $77 million in net income as recently as 2006.

Granted, there's no sign K-Swiss is on a path to return to those levels any time soon. But if you believe in management's ability to turn this ship around -- something it's done successfully in the past -- K-Swiss could be a compelling value play for patient investors.

A closer look at Johnson & Johnson
Investors squealed and squirmed last week when Johnson & Johnson missed revenue estimates by a rounding error. We'll be frank: That's the kind of overreaction to nothingness that bargain-hunting investors should be scrambling to find.

If your investment horizon is confined to a quarter or two, sure, Johnson & Johnson might look ugly. But if you look longer-term, you'll see a world-class health care conglomerate with one of the most successful anti-bureaucratic business models in the world, trading at a historically appealing 13 times earnings. As CAPS member bbluemz writes:

One of the best stocks and companies to own in the world. Diverse and [quality] products in the health care sector. Conservative and great [management] with a friendly shareholder attitude. An average compound return of 10 percent for over 120 years. It is like buying a saving bond! Easy to sleep at night with [Johnson & Johnson]. Will be over $100 in four to five years.

A closer look at Clorox
So you think the U.S. consumer is dead, do you? Hey, I can't disagree. But investors' appetite for high-quality consumer-staples companies is no less flatlined. Clorox is one of them. Amid fears -- generally true -- that private-label brands from Costco (Nasdaq: COST  ) and Wal-Mart (NYSE: WMT  ) are stealing name-brand companies' turf, shares have been dumped to overly pessimistic levels our CAPS community can't resist. As CAPS member alfred13 writes:

Great dividend stock with both earnings and dividends growing at 10% plus, with stability. If you are trying not to mess up, this is a good stock for you. If you are trying to beat the market, this is a good stock for you. When stock fits into both of those categories, then it is hard to resist.

Shares currently trade at about 12.6 times forward earnings estimates, compared to an average multiple of more than 22 times earnings going back to 1993. Bargain hunters, rejoice.

You take it from here
Have your own take on any of these companies? More than 140,000 investors use CAPS to share ideas and swap opinions. Click here to 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. Costco Wholesale is a Motley Fool Stock Advisor recommendation. Costco Wholesale and Wal-Mart Stores are Motley Fool Inside Value recommendations. Clorox and Johnson & Johnson are Motley Fool Income Investor selections. The Fool owns shares of Costco Wholesale and has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2009, at 12:19 AM, streetflame wrote:

    Those aren't ridiculously cheap, just normal cheap.

    Compare them with companies like HWG trading for 4.4x trailing earnings, SPAR at 6x, SVT for 6.5x, MT at 5.9x, RIG at 7.9x, E at 8.1x, MIR at 1x, CYD at 10x, GLF at 5.7x, ACY at 8x, HS at 6.7x, RDC at 6.8x, WH at 5.1x, CSR at 10.6x, TDW at 6.6x, ISH at 6.9x, GIGM at 7.8x, ESV at 6.9x, DVR at 7.8, TGE at 7.5, CMM at 7.5, SCR at 9.6, CPHI at 8.2, ECA at 8.0, NEP at 6.2, IEC at 3.7, ENP at 3.3, or SGZH at 4.4. Admittedly some of these are coming off cyclically high earnings, but all of these companies have greater growth prospects than your 3.

  • Report this Comment On October 21, 2009, at 12:19 AM, streetflame wrote:

    Those aren't ridiculously cheap, just normal cheap.

    Compare them with companies like HWG trading for 4.4x trailing earnings, SPAR at 6x, SVT for 6.5x, MT at 5.9x, RIG at 7.9x, E at 8.1x, MIR at 1x, CYD at 10x, GLF at 5.7x, ACY at 8x, HS at 6.7x, RDC at 6.8x, WH at 5.1x, CSR at 10.6x, TDW at 6.6x, ISH at 6.9x, GIGM at 7.8x, ESV at 6.9x, DVR at 7.8, TGE at 7.5, CMM at 7.5, SCR at 9.6, CPHI at 8.2, ECA at 8.0, NEP at 6.2, IEC at 3.7, ENP at 3.3, or SGZH at 4.4. Admittedly some of these are coming off cyclically high earnings, but all of these companies have greater growth prospects than your 3.

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