The Cheapest Stocks I Know

As a member of the Rule Breakers newsletter team, few will confuse me for a deep value investor. I prefer turnover to turnarounds. I define the C in DCF as "catalysts." I find more investing ideas going over lists of heavily shorted stocks than those hitting fresh 52-week lows.

Despite all this, I am no spendthrift. I am passionately cheap. The catch is that I see great prices in growth stocks. I think that's important. Value investors may have been jumping all over real estate developers last summer, when they seemed to be trading at single-digit P/E multiples. What happened? Earnings crashed, multiples expanded, and homebuilder stocks fell even further.

I prefer to hitch my portfolio's wagon to stocks that are growing. You can try your luck at nailing the top and bottom of cyclical stocks. I won't. Why should I, when there are just way too many bargains out there from stocks that have consistently delivered the goods?

Five for the road
Now that the 2006 earnings season is shrinking in the rearview mirror, investors are looking ahead to 2007 growth projections. More importantly, we're now getting forward estimates for fiscal 2008.

Let me run a few names past you. Tell me if you thought they were trading for higher forward multiples than they actually are.

Recent Price

2008 EPS

2008 P/E

Apple (Nasdaq: AAPL  )

$84.64

$3.78

22.4

Google (Nasdaq: GOOG  )

$460.25

$18.42

24.9

Travelzoo (Nasdaq: TZOO  )

$34.22

$1.46

23.4

eBay (Nasdaq: EBAY  )

$32.91

$1.51

21.8

Intuitive Surgical (Nasdaq: ISRG  )

$112.64

$3.50

32.1

Data from Yahoo! Finance.

Apple's been on a tear with its iPods. The company has moved more than 90 million of the portable digital media players. Its Macs are selling briskly, too. Over the past three years, Apple's net income has grown by 286%, 399%, and 50%, respectively. Even with bottom-line growth slowing, do you really think Apple is expensive at 22 times next year's earnings?

Google has been growing like a weed. We all know how it has lapped Yahoo! (Nasdaq: YHOO  ) in paid search. Too rich? Really? At just 25 times its expected net income come 2008?

Surely, Travelzoo can't be cheap! The company behind the Travelzoo Top 20 email of sponsored vacation bargains -- which goes out to more than 10 million opt-in recipients -- has to be expensive. You don't double your profits and sport 24.3% in net profit margins this past quarter without commanding a king's ransom, right? Wrong. Quibble if you must about Travelzoo's moat, but I'm trying to emphasize that you can snap up shares of the company right now, for just 23 times next year's bottom-line production.

The same thing goes for eBay. With its namesake site, PayPal, Skype, and Shopping.com, the company has collected some winning verbs over the years. Now I'm slapping an adjective on it: cheap.

Intuitive Surgical may be the priciest of the lot -- at 32 times 2008's profits -- but the company's robotic arms are revolutionizing the health-care industry. It's a disruptive technology that is making hospitals more efficient on the operating table Operating profits soared 56% higher last year. Do you really think you can acquire that kind of growth any cheaper?

Buying the right kind of growth stock
The companies that I consider -- heck, demand to be considered -- cheap are growing at incredible rates, yet they're priced as if they were only modestly above average. They also have a history of blowing past analyst profit targets, so the forward-looking estimates have a pretty good chance of being revised higher in the coming quarters.

That's where I want to be. Yes, Rule Breakers is a growth stock newsletter service. Dig deep into the scorecard and you will find:

  • A fast-growing Chinese leisure dynamo, trading for less than 20 times this year's earnings.
  • An airport security specialist fetching just 20 times forward profitability.
  • Intuitive Surgical, which has more than doubled since its initial recommendation, yet still looks cheap in my book.

Growth stocks are the greatest value stocks I know. Remember when Google went public at $85 in the summer of 2004? Did you think it was overpriced at the time? If so, you weren't alone.

But no one knew that the company was positioning itself to earn $18.42 a few years later. Those who got into Google early snapped up a stake in the paid search giant for just 4.6 times next year's profits.

Getting in early on the right growth stocks is the key. Just your luck -- the growth-stock kissing booth doesn't seem to have much of a line these days. Pucker up, my friend.

Intuitive Surgical is a Rule Breakers pick. If you want to unearth the other "potentially cheap" stocks in the newsletter, punch in now for a free 30-day trial offer.

Longtime Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this story, even though he recognizes that nearly all of the 50 states ban marriage between a man and a stock. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. eBay and Yahoo! are Motley Fool Stock Advisor recommendations. The Fool has a disclosure policy.


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