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 are paying for the expected long-term growth. If a company has a PEG of 1, then for each point of growth you are paying one times earnings. But if growth expectations are higher than the PE, the PEG dips below 1 and you are getting more bang for your buck!
Now, the fun part
With that said, here are seven cheap stocks with great growth potential which are also highly rated by our 110,000-plus-member Motley Fool CAPS community.
These stocks have:
- Expected five-year growth rates above 10%.
- PEs below 15.
- PEGs below 0.8.
- Top ratings (four or five out of five stars) from our community of investors.
|
|
Estimated 5-Year
Annual Growth
|
PEG Ratio
|
CAPS Rating
|
Fools Saying Outperform
|
|
ConocoPhillips (NYSE: COP )
|
14.0%
|
0.45
|
****
|
3,546 of 3,689
|
|
Nasdaq OMSX Group (Nasdaq: NDAQ )
|
21.9%
|
0.70
|
*****
|
542 of 562
|
|
Transocean (NYSE: RIG )
|
25.4%
|
0.37
|
*****
|
4,031 of 4,122
|
|
UnitedHealth Group (NYSE: UNH )
|
12.2%
|
0.76
|
****
|
2,435 of 2,541
|
|
Tata Motors (NYSE: TTM )
|
20.0%
|
0.56
|
*****
|
2,079 of 2,144
|
|
Noble (NYSE: NE )
|
24.4%
|
0.37
|
*****
|
1,519 of 1,537
|
|
Garmin (Nasdaq: GRMN )
|
15.1%
|
0.77
|
****
|
4,831 of 5,105
|
Data from Yahoo! Finance and Motley Fool CAPS.
While these stocks aren't recommendations, they are a great starting point for research. To get you started, here's a summary of one stock that caught my attention.
A carmaker? RUN!
For the past year, Mr. Market has been running away from carmakers. An industry as shunned as this one is a good place to look for potential growth on the cheap. Tata Motors, a car manufacturer from Mumbai, India, has been dropped by investors along with all the other carmakers these past few months. However, an overwhelming majority (96%) of the 662 All-Star CAPS members who have rated Tata believe this stock is going to beat the market going forward.
So far this year, Tata's stock has fallen 46%. Slowing growth, rising costs, and general fear of the car market all conspired to bring this stock down, but is it warranted? Tata's revenue growth did slow from its five-year annual average of 30.2%, to just 7% this past quarter, as would be expected in a global slowdown. But do you really think that the leading carmaker in India, a country with 1.1 billion people, is going to have that slow growth forever?
There are two reasons why I think the answer is "no." First is Tata's Nano, the world's most affordable car. This car should bolster Tata's position in its home market of India and provide inroads into other developing nations.
Second is the huge potential of a population of more than 1 billion. Any reasonable fraction of that is a huge absolute number. And, as people move up the economic ladder, more will probably become car owners. According to a CLSA survey last fall, 21% of Indian households plan to purchase a car within the next three years.
What the community thinks
Click over to Tata Motors' CAPS page and you'll find numerous arguments centering on its dominant position in India's exploding market, excellent management, and strong brand. CAPS All-Star Gtrinvestor pointed out early this year:
Ford made it in the early days b/c it built the first affordable car (not the first car) for the common working man in a country where the size of the "common working man class" was growing rapidly and in an economy that was growing solidly. Hmmm, if I could only go back in a time machine and invest back then in that situation... I think Tata is really just now [starting] to get some real investment exposure.
Finding value in growth stocks
So, are these beaten-down growers worth a look or are their growth prospects illusory? Join our Motley Fool CAPS community to get more analysis on the above ideas, create your own list of undervalued growers, or weigh in with your own expert opinion. Best of all, it's absolutely free.
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