3 Ridiculously Cheap, High-Quality Companies

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Of all insight I've heard over this past year, 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 wrapped in failure. Big failure. Many companies that overleveraged their balance sheets are permanently impaired and will never fully rebound. AIG (NYSE: AIG), Citigroup (NYSE: C -- those kind of companies come 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	TTM Return on Equity	Dividend Yield	CAPS Rating   (out of 5)
BP (NYSE: BP)	$57.83	9.39	6.5%	8.68%	5.8%	*****
Kraft (NYSE: KFT)	$27.17	12.5	8.07%	9.4%	4.3%	****
Pfizer (NYSE: PFE)	$18.36	8.12	1.53%	12.12%	3.5%	****

Data from Yahoo! Finance and Motley Fool CAPS, as of Nov. 22.

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

A closer look at BP
OK, so you think Ben Bernanke is going to print money until we all drown in a sea of inflation, do you? I don't blame you. But rather than jump on everyone's favorite inflation hedge, gold (the same people saying gold can go nowhere but up rely on the same stretched, fanatical, arguments used to justify housing's endless potential in 2005), may I suggest another commodity that can hold its purchasing power, provides actual utility to the economy, and spew off huge dividends? I'm talking oil, and the company in focus is BP.

Not only does BP look cheap on an absolute basis, but comparatively so next to some of its Big Oil buddies, at about nine times forward earnings compared to, say, ExxonMobil  (NYSE: XOM) at nearly 13. The big bright spot here is its 5.8% dividend, which trounces just about anything you'll find among peers. As CAPS member arizonalawdog wrote earlier this summer (when the dividend yield was slightly higher), "How can you beat a great run company, a 7% dividend, and growth prospects as oil runs out and demand eventually increases?"

A closer look at Kraft
Most of the utterly disturbing values have dried up over the past many months. The easiest of the easy money is gone. Solid companies trading at five-times earnings, Alcoa (NYSE: AA) at $5 a share ... that was the stuff of this past March. You just don't find that any more.

What you can find, and what is still quite appealing, are companies like Kraft: World-class brands selling nondiscretionary items, trading attractive earnings multiple, and throwing off solid dividends, providing investors with stable, sturdy, respectable, long-term returns. "[Kraft] just strikes me as a winner right now. Good (safe?) yield, decent P/E situation, true blue-chip company, plus it just got its butt kicked. So I bought a small piece at $26.67 right at close" writes CAPS member scluffman.

A closer look at Pfizer
I don't know what health-care reform will do to the industry. I still don't know what death panels are, or whose pipeline is on track to slay whose. I don't know too many intricacies of the pharmaceutical industry. But I do know that when you buy a company like Pfizer at no more than eight times forward earnings and hold on for dear life, patient investors will almost certainly be pleased with results in due time. As CAPS member ACMIP wrote earlier this year:

Considering the large FCF yield and the quality of their business, investors should earn outstanding risk-adjusted returns over the next few years as the market awards Pfizer with a more appropriate valuation. 

Why [Pfizer] (which is capable of generating at least $2 per share in owner earnings going forward) should trade hands at a discount to the run off value of its current portfolio is a mystery to me. A multiple rerating is only a matter of time. Outperform.

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.

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