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, 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. Miller's fund has suffered because of core holdings in some recently deceptively cheap stocks such as UnitedHealth Group (NYSE: UNH  ) , Aetna (NYSE: AET  ) , and Sprint (NYSE: S  ) .

Given the 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 Bill 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 short list:

  1. A balance sheet with lots of cash and no debt.
  2. An EV/EBITDA ratio less than 6.
  3. A business with the financial strength and strategy to survive and thrive in a down economy.
  4. No potential for massive writedowns.
  5. The stock price has been pummeled.

Of course, there's not a single American company with a market cap of more than $4 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 EMC (NYSE: EMC  ) attract far too much investor attention to ever become inefficiently priced. That $22 billion tech giant is tracked by 30 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 -- Chico's (NYSE: CHS  ) ,Volcom   (Nasdaq: VLCM  ) , and Obagi Medical Products (Nasdaq: OMPI  ) look outrageously cheap.

Company

EV/EBITDA

Cash and Equivalents on Hand

Investors Scared Because of ...

Chico's

4.4

$278 million

Weakening retail spending outlook.

Volcom

4.7

$71 million

Weakening retail spending outlook.

Obagi Medical Products

5.8

$23 million

How the worsening economy would affect discretionary spending on skin products.

Data as of April 29.

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, as a result of inefficiencies and a 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.

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

Tim Hanson owns no shares of any company mentioned. Volcom is a Motley Fool Hidden Gems selection. UnitedHealth is a Stock Advisor and Inside Value recommendation. Sprint is an Inside Value recommendation. The Motley Fool owns shares of UnitedHealth. The Fool's disclosure policy is decidedly un-outrageous.


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  • Report this Comment On October 07, 2008, at 8:24 PM, SteveTheInvestor wrote:

    Over the last year, every time I saw a "back up the truck" recommendation, it has turned out to be a bad idea. The market is a disaster and may well collapse under it's own weight. Think I'll take a pass.

  • Report this Comment On October 13, 2008, at 8:31 PM, kastmaster wrote:

    I just bought $500,000 in Volcom stock after reading this article. I cannot WAIT to lose my money! It turns me on :)

    Please write another article. I will buy any stock that you suggest. I get pleasure in investing my money, and then losing it! Yumm.

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