Now is a fantastic time to be a value investor, and it's an even better time to be a growth investor. Super-investors such as Buffett, Greenblatt, and Fisher did well buying growing companies for rock-bottom prices. These guys weren't just buying outrageously cheap stocks, they bought growth potential on the cheap.
But how do you find them?
My favorite method for finding cheap growth stocks is to use the PEG ratio. The PEG ratio tells you how much you're paying for the expected long-term growth. If a company has a PEG of 1, then for each point of growth, you're paying one times earnings. But if growth expectations are higher than the P/E, the PEG dips below 1, giving you more bang for your buck!
Now, the fun part
With that said, here are four cheap stocks with great growth potential that also earn positive ratings from our 180,000-plus-member Motley Fool CAPS community.
These stocks have:
- P/Es below 20.
- PEGs below 0.8.
- Positive ratings (three, four, or five out of five stars) from our community of investors.
|
Company
|
Forward P/E
|
PEG
|
CAPS Rating (out of 5)
|
| Entropic Communications (Nasdaq: ENTR ) |
8.8 |
0.4 |
*** |
| Southern Copper (Nasdaq: SCCO ) |
9.0 |
0.5 |
***** |
| Chimera Investment (NYSE: CIM ) |
5.6 |
0.3 |
**** |
| DryShips (Nasdaq: DRYS ) |
4.2 |
0.6 |
*** |
Data from Motley Fool CAPS and Yahoo! Finance.
Networking
Entropic Communications makes MoCA networking chips that allow consumers to easily connect their electronic devices to one another and the Internet. Shares plunged 38% one day in August after the firm missed guidance as large customer Verizon ordered fewer chips than expected. Analysts expect the number of TVs connected to the Internet to grow to 500 million by 2015, from 60 million today. That translates into an expected growth rate of 16.3% over the next five years. Now is a great time to get the shares on the cheap. Click here to add Entropic to your watchlist.
Copper
Southern Copper, like fellow copper miner Taseko Mines (AMEX: TGB ) , has been reaping the spoils as copper trades near 25-year highs. Ten years ago, copper traded for roughly $1,400 a ton, but now it goes for nearly $9,000 per ton, driven by strong demand from emerging markets as well as tight supply. The metal had traded as high as $10,000 in the past few months but has fallen recently as investors grew worried over the economy. Analysts continue to expect copper prices to stay relatively strong, contributing to Southern Copper's 20% expected growth rate. Definitely worth watching; click here to add Southern Copper to your watchlist.
Mortgage REIT
Chimera is one of the market's highest yielding REITs as well as one of the highest yielding stocks. Both Chimera and its parent company Annaly Capital Management (NYSE: NLY ) are REITs, which own securitized mortgages. They profit by borrowing money at low rates and then investing in mortgages that pay higher rates. While some investors believe Annaly is a safer play than Chimera on the mortgage market, others think you can't go wrong with either. Click here to add Chimera to your watchlist.
Shipper or driller?
From its name, you would assume DryShips operates dry bulk ships, and it doesn't disappoint, with the largest fleet of any publicly traded dry bulk shipper. But recently, DryShips generated more revenue from its ultra-deepwater drillships than it did from its dry bulk business. SeaDrill (NYSE: SDRL ) and other drilling stocks have performed well the past year as demand for their rigs has risen. DryShips stock has been punished due to large amounts of debt.
Investors have one thing to look forward to: The company plans on spinning off its Ocean Rig business in the next year or so. The company sold a 22% stake to investors in December for $500 million, valuing the oil rig business at just under $2.3 billion. Earlier in the summer, the company announced it would do a partial spinoff of 2% of Ocean Rig later this month, followed by a full spinoff at some point in the future.
The stock is down nearly 40% in the past six months. At this level, while the risks are high -- the company has a huge $3.8 billion debt load -- the potential rewards are high enough to warrant a speculative position. Click here to add DryShips to your watchlist.
Finding value in growth stocks
If you're looking for some other ideas for strong outperformers in the year ahead, The Motley Fool has created a new free report called "The Hottest IPO of 2011." In it, we reveal the little company set to profit from a big brands expansion into Latin America. Get instant access by clicking here -- it's free.
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