The Cheapest Stocks I Know

As I'm a member of the Rule Breakers research 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 in lists of heavily shorted stocks than among the fresh 52-week lows.

Despite all this, I am no spendthrift. I'm 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 contracted, 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, but 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 we're just dipping into the brand-new year, we're starting to get a handle on 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

This Year EPS

Forward P/E

Marchex (NASDAQ:MCHX)

$7.98

$0.38

21.0

Akamai (NASDAQ:AKAM)

$29.72

$1.65

17.9

Take-Two Interactive (NASDAQ:TTWO)

$16.47

$0.93

16.8

Hansen Natural (NASDAQ:HANS)

$38.50

$2.10

19.5

Travelzoo (NASDAQ:TZOO)

$15.90

$0.78

20.3

Data from Yahoo! Finance.

Finding growth stocks with 2008 profit multiples running mostly in the teens isn't necessarily cheap, but dig a little deeper to appreciate what some of these companies are doing.

Marchex is sitting on a domain portfolio of tens of thousands of lucrative names that it's just beginning to monetize. Akamai is speeding up Internet content delivery, a niche that will only be more in demand as media companies begin to sell more of their content digitally. Take-Two is just a few months away from the next installment in its popular Grand Theft Auto video game series. Hansen's Monster continues to be the energy drink of choice, alongside Red Bull. Travelzoo keeps growing its list of opt-in recipients of its top travel deals weekly newsletter.

All five companies are growing, with analysts expecting healthy advances come next year. If you're looking for bigger, more familiar names, Cisco is now fetching just 13.5 times this year's earnings, while EMC (NYSE: EMC  ) is going for a reasonable 16 times this year's projected profitability. It wasn't too long ago that both of these tech bellwethers commanded substantial market premiums.

These are important growth stocks, yet they are fetching multiples that seem a better fit with sleepy utility stocks or predictably steady money-center banks. So how can these not be the cheapest stocks that you know, too?

I'm sorry: They're affordable.

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'll find:

  • One of China's biggest online multiplayer game makers, with ridiculously wide profit margins, trading for less than 15 times this year's projected profitability.
  • A luxurious pampering services specialist fetching just 12 times forward profitability.
  • Two of the five stocks I mentioned earlier -- Take-Two and Akamai -- continue to have bright futures and do, in fact, look 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 $20.78 per share come 2008. Those who got into Google early snapped up a stake in the paid search giant for just 4.1 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 have much of a line these days. Pucker up, my friend.

Take-Two and Akamai are Rule Breakers picks. If you want to unearth the other "potentially cheap" stocks in the newsletter, punch in now for a free, 30-day trial offer.

This article was originally published Feb. 15, 2007. It has been updated.

Longtime Fool contributor Rick Munarriz does not own shares in any of the companies in this story. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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