3 More Outrageously Cheap Stocks

With all of the recent volatility in the market, what stocks are outrageously cheap?

I found one recently, and I got to thinking about the others out there when I read money manager Bill Miller's comment that "the market abounds with good value." Of course, Mr. Miller also wrote last August that stocks were the cheapest they'd been since 1991 ... and after a brief rebound, they've gone right on dropping. Mr. Miller's fund has suffered thanks to core holdings in some recently deceptively cheap stocks such as Eastman Kodak (NYSE: EK  ) , Electronic Arts (Nasdaq: ERTS  ) , and General Electric (NYSE: GE  ) .

Given wary financial markets, a recent rash of writedowns, and a slowing economy, it should be clear that not all stocks that look cheap are cheap (with no disrespect intended to the talented Mr. Miller). Both Warren Buffett and John Hussman have recently affirmed that lesson.

There are, however, some individual stocks today that, for one reason or another, not only present "good value," but are outrageously cheap.

Back up the truck, people
What makes for an outrageously cheap stock? Here's my shortlist:

  1. A balance sheet with lots of cash and little to no debt.
  2. An EV/EBITDA ratio less than 4.
  3. A business with the financial strength and strategy to survive and thrive in a down economy.
  4. No potential for massive writedowns.
  5. A stock that's been pummeled.

Of course, there's not a single American company with a market cap of more than $5 billion that meets those criteria, so if you're looking for an outrageously cheap stock, you may need to start thinking of yourself as a small-cap investor.

Welcome to the jungle
In truth, large caps such as AT&T (NYSE: T  ) attract far too much investor attention to ever become inefficiently priced. That $150 billion tech giant is tracked by 29 sell-side analysts.

You generally won't find as much interest among small caps, which is one of the reasons why -- given the criteria above --Crocs (Nasdaq: CROX  ) , Gymboree (Nasdaq: GYMB  ) , and Cryptologic (Nasdaq: CRYP  ) look outrageously cheap.

Company

EV/EBITDA

Cash on Hand

Investors Scared Because...

Crocs

1.0

$51 million

They think the shoes are a fad.

Gymboree

3.5

$44 million

Worsening economy will affect consumer spending.

Cryptologic

2.8

$58 million

Worsening economy and legislation could hurt Internet gambling.

Data as of November 5.

Yes, that last subhead was a Guns N' Roses reference
The reason we love being small-cap investors at Motley Fool Hidden Gems is because it's the one area of the market where, thanks to inefficiencies and lack of Wall Street interest, stocks can become outrageously cheap. Of course, in a down market like this one, that lack of efficiency can make for some gut-wrenching downside volatility.

But we're using current market conditions to recommend the market's best small companies -- stocks that should crush the market averages over the next decade or more.

To see our newest recommendations and top picks for new money now, click here to join Hidden Gems free for 30 days. There is no obligation to subscribe.

This article was first published on March 14, 2008. It has been updated.

Tim Hanson does not own shares of any company mentioned. Cryptologic is a Motley Fool Hidden Gems recommendation. Electronic Arts is a Stock Advisor recommendation. Crocs is a Hidden Gems PayDirt pick. The Fool's disclosure policy is decidedly un-outrageous.


Read/Post Comments (2) | Recommend This Article (4)

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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 November 13, 2008, at 4:00 PM, Soulshine1 wrote:

    CRYP was highly recommended at 23. It's been recommended all the way down to it's current price. You know what I'd like to read? "WE RECOMMENDED THIS STOCK WHEN IT WAS 23. WE WERE WRONG. OUR BAD."

  • Report this Comment On November 13, 2008, at 4:12 PM, MonsterZero71 wrote:

    Hey, remember when Cryptologic was your "stock of the year?"

    What's it down, 80% or so from then?

    Funny how quiet you got. BTW, investors aren't afraid of CRYP because of gambling legislation. They're afraid because they've taken quarterly loss after loss and burne through about 70 million in cash.

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