7 Highly Rated Stocks on Sale

I am always looking for a good deal, whether that means buying an extra box of Frosted Flakes when they're on sale or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than its worth may seem silly, but legendary value investor Ben Graham tells us, by way of allegory, how we can look out for these situations.

In The Intelligent Investor, Graham introduces readers to a wacky guy named Mr. Market. Mr. Market's game is to pay you house calls on a daily basis to offer to sell you interests in businesses he owns or to buy from you interests in businesses you own. Sometimes Mr. Market will show up at your door very excited and offer you premium prices for your holdings, while at other times he'll be inconsolably depressed about the future and will offer to sell you what he has for as low as pennies on the dollar.

So to find some of the stocks that Mr. Market is depressed about, I've turned once again to The Motley Fool's CAPS investor community. Each of the companies below had been given a five-star rating (the highest) by our community of investors just 30 days ago:

As the table shows, these stocks are all still very well-regarded by the CAPS community, despite their underperformance over the past month. While these are not formal recommendations, they could be a great place to kick off some further research. I'll even get you started with some thoughts on Stock Advisor recommendation Barr Pharmaceuticals.

Why so blue?
Here's a really simple formula for sending a stock into a tailspin: Report earnings that are well below what the market expects and lower the outlook for the rest of the year. Mix those up just a bit and you've got guaranteed pandemonium.

Barr recently cooked up such a concoction and the results were as expected. For its first quarter the company reported $0.57 of adjusted earnings per share, which came in well below the $0.79 that Wall Street wanted. To top it off, the company cut its full-year earnings outlook about 10%, citing a number of contributing factors, including lower sales of oral contraceptives and lower revenue from generics in the U.S. Barr's stock sank 23% on the news.

What the bulls say
Many investors and analysts think the reaction to Barr's quarter was unwarranted, and are keeping an eye to the company's longer-term prospects. Among other positives on the horizon, Barr just recently was approved to start selling a generic version of Bayer's birth control pill, Yasmin. And it has even more on the burner for 2009.

Though there are a handful of Barr bears on CAPS, more than 800 players think the stock will outperform the S&P 500. Petecraig1 is one of those bulls and gave the stock a thumbs-up when the stock took its dive. He thinks a major player in generic pharmaceuticals is too good to pass up at this price:

The basis for owning this ... is that the industry is in for long, appreciating demand with the population aging and the economy prepared for inflation. Recession money is decently sheltered in basic necessities, such as groceries, utilities, and pharmaceuticals. Demand is only going to grow and this price opportunity presents a buying opportunity, even if the wait for a significant rise is 6mos to a year away. Another example of the market overreacting to a downward adjustment of earnings in the near term.

So do you think the recent drop has created a good buying opportunity? Or is there more downside ahead? Let the community know what you think -- head over to CAPS and share your thoughts with the other 100,000-plus players currently part of the community. Even if you'd prefer to pass on Barr, you can check out a couple of the other stocks listed above or any of the 5,600 stocks that are rated on CAPS.

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