3 Ridiculously Cheap, High-Quality Companies

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Of all the insight I've heard over this past year, the most telling came from an investor who appeared on CNBC 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 145,000-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)
Southern (NYSE: SO)	$31.61	13.01	4.56%	11.38%	5.5%	****
General Dynamics (NYSE: GD)	$67.08	10.29	7.8%	20.28%	2.3%	****
Bristol-Myers Squibb (NYSE: BMY)	$25.38	11.59	4.99%	27.57%	4.9%	*****

Data from Yahoo! Finance and Motley Fool CAPS, as of Nov. 29.

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

A closer look at Southern
In his most recent monthly investment outlook, PIMCO's Bill Gross forecast the sorry state of the U.S. economy going forward: slower growth, rock-bottom interest rates, debt deleveraging -- in short, not a lot of fun. "As banks, auto companies, and other corporate models become more regulated," Gross wrote, "and therefore more like utilities and less like Boardwalk and Park Place, they will return less."

Makes sense. His solution?

[W]hy not just buy utilities if that's what the future American capitalistic model is likely to resemble. Pricewise, they're only halfway between their 2007 peaks and 2008 lows -- 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6%, not .01%!

One such example is Southern. Investors currently get a 5.5% dividend yield, and that dividend hasn't been lowered since at least 1987. When money market accounts yield nothing, I'd happily take 5.5% backed by 4.4 million customers' willingness to keep their lights on.

A closer look at General Dynamics
So you're worried about two things: overreaching governments, and lack of consumer demand. No one can blame you. Government spending is up and demand for Treasuries remains fierce, while consumer spending treads water and consumer credit dries up. What's one industry that fits this new reality? How about one that does an inordinate amount of business with Uncle Sam? And, no, I'm not talking banks. I'm talking defense contractors. As CAPS member knockoutMouse writes of General Dynamics:

Like it or not, America needs the stuff this company makes: tanks, destroyers, littoral combat ships, submarines. It doesn't mater who the President is, we are going to buy this stuff because it is basic for our defense. That is why the earnings at [General Dynamics] continue to grow faster than analyst's forecasts. [General Dynamics] even raised their dividend in the midst of the financial crisis. High ROE, low debt, and a large backlog. Buying on a recent pull-back in price.

With 69% of its revenue coming from the U.S. government, and at about 10 times next year's earnings and a 2.3% dividend yield, General Dynamics is in a stable industry and its shareholders are being properly compensated. Other government-heavy companies, such as Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC), can say the same.

A closer look at Bristol-Myers Squibb
Private option or no, political grandstanding or otherwise, demand for good, quality, health services isn't going away. The horror stories over reform are likely to be wildly overblown, and what fear is warranted should primarily rest in the insurance industry.

What about pharmaceuticals? By and large, these are great companies with proven track records whose share prices unfortunately get associated with "death panel" chatter. Take Bristol-Myers Squibb. It trades at about 11 times next year's earnings and cranks out a 4.9% dividend. In this economy, I'd take that any day. As CAPS member JamesMBarker writes:

Drugs will enhance our quality of life and they are just now getting started. [Bristol-Myers Squibb] has a good portfolio and management is focused on enhancing revenues for future growth. Great dividend also. What's not to like?

You take it from here
Have your own take on any of these companies? More than 145,000 investors use CAPS to share ideas and swap opinions. Check it out for yourself, and speak your mind. It's 100% free to participate.

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