6 Cheap Stocks You Can Buy Today

As in past crises, the current dislocation in the credit market has spurred a "flight to safety," with investors pulling out of equities and putting their money into safer vehicles. The increased demand for government securities shows that investors are more willing to trade yield for security than previously -- witness the yield on the 10-year U.S. Treasury bond, which has fallen from 4.52% six months ago to a measly 3.72%.

Clearly, you'd have to be certifiable to be increasing your exposure to stocks in this market. Or not.

One group of professional investors is doing just that -- and far from being crazy, they practice a highly rational approach to investing.

While many are panicking, others are buying
In a Feb. 4 article, The Wall Street Journal identified a number of smart mutual fund managers who have been buying up stocks. They are: Don Yacktman (The Yacktman Fund), David Winters (Wintergreen), Jean-Marie Eveillard (First Eagle U.S. Value), Bruce Berkowitz (Fairholme), and three of the teams at Marty Whitman's Third Avenue Management.

If you haven't heard of these folks, you should know that they have all achieved exceptional long-term returns, outpacing their peers and their benchmark indexes. They've done so by being first-rate value investors -- and never overpaying for stocks.

What's more, none of them are frustrated by current market conditions. At a value investing conference at Columbia Business School in February, the mood was as light as you could imagine given that several panels -- Eveillard and Winters were both participants at different times -- focused their discussions on the housing market and the credit crunch.

You might say they're positively joyful
In fact, one panelist suggested that enormous opportunities would result from the financial unwinding now under way. What might those opportunities be? Let's start by looking at the stocks some smart value investors have already bought and that you can buy today ... for cheaper:

Does this mean that you should purchase these stocks immediately? Not so fast: I'd never recommend that anyone buy a stock without understanding the rationale for doing so. Nevertheless, watching what other great investors are buying is as good a place as any to start when looking for investment ideas.

How you can profit in this market
Our short list of stock ideas has another attractive characteristic. Value investors never invest without a margin of safety -- i.e., they buy only stocks that are selling at a discount to their estimated intrinsic value. This provides protection against an unexpected deterioration in the fundamentals of the business or an error in evaluating intrinsic value.

That means if you can pay less for a stock than the price paid by a successful value investor -- as is the case for the stocks in the table -- you've got yourself a discount on an already discounted price.

Of course, it's never that easy
Two catches apply here. First, it can be psychologically difficult to purchase a stock that has fallen in price, because it amounts to acting in defiance of the negative feedback from the market. Second, purchasing a stock at a discount is only half the battle; selling well is critical, too. Although a value investor's ideal holding period is forever, that may not always make sense in practice. Selling well means being able to continually re-assess the value of the stock, which requires judgment and experience.

At Motley Fool Inside Value, my colleagues and I spend our time hunting for undervalued stocks and following existing recommendations. We're dyed-in-the-wool value investors, so it's no coincidence that one of the stocks in the table above - UnitedHealth Group -- was already a recommendation of ours.

If you're ready to profit from the current market instead of cowering at it, I invite you to take a 30-day free trial of Inside Value -- where you'll discover how much fun (and profitable) being contrarian can be.

This article was first published Feb. 28, 2008. It has been updated.

Alex Dumortier started out imitating value investors in order to become contrarian. He has no beneficial interest in any of the companies mentioned in this article. UnitedHealth Group is a Motley Fool Stock Advisor and Inside Value selection. Ariel, Fairholme, and Yacktman are Champion Funds picks. The Fool has a disclosure policy.