10 Insanely Cheap Value Stocks

With the S&P 500 having doubled off its lows from the depths of the financial crisis and now trading slightly above 16 times earnings despite economic headwinds, the market as a whole seems either fairly priced or downright expensive (depending on your view of the world). Such markets pose a real threat to many investors because they diminish the opportunities available and increase the chances we'll overpay for stocks.

Fortunately, this news comes with a silver lining. Even in severely overpriced markets, investors can find bargains. In that vein, I recently ran a screen to try to uncover attractive opportunities in the market today.

Despite signs that the market today may be a tad pricey, my search still yielded several attractive candidates.

I included metrics that test for high margins, strong profitability, growth, and limited leverage. Most companies can only achieve one or two of these. Accomplishing all three is a sign of a great company. And it's insane when such excellent companies are trading at less than 10 times earnings.

Here are the metrics I used:

  • Return on equity, which demonstrates the return on capital a business can generate for its shareholders.
  • The EBIT (short for Earnings Before Interest and Taxes) margin, which provides a rough measurement of the percent of cash a company keeps from its operations. Companies that have profitable core businesses appear more attractive to investors since they can use that cash to return to shareholders or invest in future growth. Stripping out interest and taxes makes these figures less susceptible to dubious accounting distortions.
  • The EBIT growth rate, which demonstrates whether a company has been successful expanding its business.
  • I also excluded companies that had greater debt than equity.

I used five-year averages to help smooth away one-year irregularities that can easily distort regular business results.  

 

Company

Return on Equity

(5-Year Avg.)

 

 

EBIT Margin

(5-Year Avg.)

 

EBIT Growth

(5-Year Avg.)

P / LTM Diluted EPS Before Extra Items

Microsoft

42.6%

38.5%

10.6%

9.73

Vale S.A. (NYSE: VALE  )

29.1%

41.1%

46.1%

6.02

Rio Tinto

29.1%

29.2%

42.5%

8.79

AstraZeneca (NYSE: AZN  )

39.2%

35.2%

16.2%

8.92

Eli Lilly (NYSE: LLY  )

25.6%

27.6%

13.2%

8.74

Corning (NYSE: GLW  )

26.9%

18.6%

24.9%

9.07

Cliffs Natural Resources (NYSE: CLF  )

26.0%

21.4%

77.9%

8.58

Diamond Offshore

34.7%

48.2%

49.5%

10.9

Taseko Mines (AMEX: TGB  )

39.8%

19.3%

1,108.0%

6.55

Harbin Electric (Nasdaq: HRBN  )

25.6%

29.6%

59.5%

8.22

Source: Capital IQ, a division of Standard & Poor's.

As is often the case, stocks become cheap because they are overlooked or stigmatized for some reason. These companies tend to fit the bill.

The obscure
For one group, you see beneficiaries of the boom in commodity prices (Rio Tinto, Vale, Cliffs, Diamond, and Taseko) appear widely here.  However, since these companies mostly operate outside the U.S, they're outside the familiarity of many investors. These companies have witnessed the prices of the commodities they sell shoot swiftly upward over the past several years. While these companies all demonstrated the smarts to exploit the boom in commodities, they all fit somewhat cleanly as a group within the context of the commodities run-up.

The unpopular
Negative expectations dominate the headlines for companies in the second group (Microsoft, AstraZeneca, Eli Lilly). Deserved or not, the market thinks the future looks more grim than the illustrious past for these companies. Microsoft's slow response to a software market expecting dramatic change in the coming years says "yesterday's news" to growth-hungry tech investors. Similarly, looming drug patent expirations have investors concerned that AstraZeneca and Eli Lilly will take an earnings hit in the coming years.

The Foolish bottom line
Markets swing wildly from cheap to expensive. However, even when stocks get pricey, investors need to resist the temptation to overpay. But a few bargains exist today -- you just have to know where to look.

If you're looking for additional investing opportunities, the Motley Fool found one stock that looks ready to soar. Click here to read about "The Motley Fool's Top Stock for 2011."

Andrew Tonner holds no positions in any of the companies mentioned in this article. The Motley Fool owns shares of Diamond Offshore Drilling and Microsoft. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (83)

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 May 25, 2011, at 8:38 PM, TheDumbMoney wrote:

    Nice article. I worry about the miners, as even a 5-year average captures only what has generally been an extraordinary time to be a miner, 09/2008 -- 4/2009-panic excepted.

    It seems to me that cyclical stocks have the interesting distinction that they often look particularly cheap as markets top, and particularly dear at bottoms. Alternatively, this is a brave new world and all of us who haven't put our life's savings in commodity stocks are going to end up bagging groceries in our eighties.

  • Report this Comment On May 25, 2011, at 9:27 PM, steveballmer wrote:

    MSFT is the best value ever! We got the Zune!

    http://fakesteveballmer.blogspot.com/

  • Report this Comment On May 26, 2011, at 12:19 AM, joemas wrote:

    I agree that the list is cheap stocks but they have been getting cheaper. You could include INTC and CSCO or MON because they do not inspire the stock holder. Some like MSFT are value cash machines that do nothing for the stock holder. Some have left the stock holder wondering why the sector is hot but my stock is not like TGB. Drug Companies are no longer safe dividend holdings because the FDA has found its teeth again and are taking big bites out of profits. Had freind that held PFE from 35 to 15 but no amount of dividend can make up for the devaluation. You NEED VALUE with GROWTH... just one man's opinion FOOL on like it is real money.

    joemas

  • Report this Comment On May 26, 2011, at 9:00 AM, Notwage wrote:

    Any recommendations for stock screeners? What screener did you use to create this list?

    Cheers!

  • Report this Comment On May 26, 2011, at 10:17 AM, Midas5280 wrote:

    I held MSFT for several years. Similar to GE, it may go up a few points, but then down again. It really didn't do anything. As many times as hotmail and MSN have been hacked in the past 18 months, there appears to be serious internal issues from a company whose business it is to develop SECURE software. I sold MSFT for a small profit after holding it long-term. I do not believe MSFT is a "value" stock at this time.

  • Report this Comment On May 26, 2011, at 10:18 AM, mikecart1 wrote:

    MSFT is dead. People need to stop mentioning it in any article. If Vista wasn't proof enough, go try out Windows 7. Two of the worst excuses for an OS in the history of computing.

  • Report this Comment On May 26, 2011, at 10:29 AM, uaku wrote:

    I agree no matter how much these guys scream microsoft is a good buy I would not put money into it. God one has to pay $50 extra to have an option to downgrade from windows 7 to windows XP.

    My understanding was when you upgrade then you get better things not 6 year old OS.

  • Report this Comment On May 26, 2011, at 10:29 AM, ServusDei7 wrote:

    These stocks are not insanely cheap. Most are selling near 5 year high. The missing dimension here is that the trailing twelve month earnings are too high and highly unlikely to be sustainable. When earnings revert to the mean, the prices will follow and go down.

  • Report this Comment On May 26, 2011, at 10:55 AM, tbonci wrote:

    If I may ask, whose screener do you use that allows you to pull 5 year avg data? I agree with the rationale of smoothing out bumps and blips, but the screener here on fool and the one with my broker (Fidelity) only offer TTM.

  • Report this Comment On May 26, 2011, at 11:08 AM, EnigmaDude wrote:

    One missing piece of the equation for long-term investors is the dividend yield. For example, some of the stocks in your list do not pay dividends. The ones that do represent even better values if you consider reinvesting the dividends.

  • Report this Comment On May 29, 2011, at 5:46 AM, mee37 wrote:

    I'd go for LLY for its high dividend yield. NYSE best dividend yielding stocks: http://goo.gl/u1Ol5

  • Report this Comment On May 29, 2011, at 7:30 AM, tinmanmf wrote:

    Instead of "Return on equity, which demonstrates the return on capital a business can generate ..." why not use return on capital? ROC is real. ROE is subject to inflation due to unappetizing influences like leverage and equity-killing losses.

  • Report this Comment On June 01, 2011, at 6:52 PM, ElCid16 wrote:

    I wish people who say MSFT is dead would put their money where their mouth is, and red thumb it. MSFT has only been trading at reasonable valuations for the past two years or so. If you invested in MSFT 8 years ago when the PE was still over 25 and the PS was still 8, then you should blame yourself for sitting on "dead money." The fact of the matter is, MSFT is a much better value play now that it was 2, 5, or 10 years ago.

  • Report this Comment On June 02, 2011, at 4:29 PM, renoryan100 wrote:

    HRBN.. Citron Research...

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