3 Ridiculously Cheap, High-Quality Companies

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Of all the insights I've heard over these few crazy months, the most telling came from an investor who appeared on CNBC last fall and advised, in all seriousness, "There're only two positions to be in right now: cash, and fetal."

Even with the recent rally, it's ugly out there. Many companies that overleveraged their balance sheets are permanently impaired and may never fully rebound. AIG (NYSE: AIG) comes to mind. We had an unprecedented boom; now we're slowly trying to crawl out of an unprecedented bust. That's how markets work.

Even so, history tells us time and time again that market panics and forced sell-offs indiscriminately throw the good out with the bad. The "sell-now-ask-questions-later" mood of global investors is providing bargain-hunting investors with the sort of opportunities we haven't seen in decades. Use that to your advantage.

Using the wisdom of our 140,000-member-strong CAPS community, I've hunted down a few dirt cheap, high-quality companies. Have a look:

Company	Recent Share Price	Forward P/E Ratio	5-Year Expected Growth Rate	TTM Return on Equity	Dividend Yield	CAPS Rating   (out of 5)
Capstead Mortgage (NYSE: CMO)	$14.09	5.76	4.5%	17.05%	15.3%	**
Humana (NYSE: HUM)	$38.02	6.94	10.57%	18.24%	N/A	****
Wal-Mart (NYSE: WMT)	$49.23	12.53	11.88%	19.89%	2.2%	***

Data from Yahoo! Finance and Motley Fool CAPS, as of Sept. 29.

Let's break down the bullish argument for each one.

A closer look at Capstead Mortgage
Capstead Mortgage is a lot like Annaly Capital (NYSE: NLY): It buy bundles of Fannie Mae and Freddie Mac mortgages, levers up, and milks the spread.

Like Annaly, the bulk of Capstead's assets are now backstopped by taxpayers, thanks to last year's Fannie and Freddie fallout, making credit risk is almost nonexistent. But investors are still hesitant to touch either, because the thought of owning a leveraged mortgage company makes people nauseated. As a result, the dividend yields on these companies are out of this world: Earlier this month, Capstead announced a quarterly dividend of $0.56 per share, which comes out to about 15%. As CAPS member normniner wrote earlier this year:

Simple business plan, and now that the guberment has pretty much backed Fannie and Freddie Mac, that takes away the credit risk of the bonds these guys bought. Now that funding is almost nothing, spread short increase, meaning bigger dividend. 

Now, that payout could get squashed if the yield curve suddenly takes a turn for the worse, but investors are being compensated handsomely enough that even a massive cut will still leave them well-off. There's room for error here. The risk-reward is quite appealing.

A closer look at Humana
Put simply, Humana is the cheapest of the big health insurers. At seven times forward earnings estimates, shares are noticeably cheaper than other insurers like UnitedHealth (NYSE: UNH) or WellPoint (NYSE: WLP).

Seven times earnings also fits squarely into the "ridiculously" cheap category this article promises. If yesterday's defeat of the public option by the Senate Finance Committee is any indication, there's undoubtedly value in the health-insurance industry. All of these companies are priced for something that looks more and more like it won't happen, at least not in the most severe way people fear.

A closer look at Wal-Mart
You don't usually find big value in a megacap stock like Wal-Mart, but there's truth to CAPS member TMFmrquakeroats's recent pitch:

Over the last 10 years, earnings have more than doubled while the stock is trading at the same price. The P/E multiple has dropped under 15 for the first time in years. At some point, the stock has to track earnings growth. I think with the stability and predictability of Wal-Mart's business, this stock has a good chance to outperform from here.

Of course, 10 years ago brings us back to 1999 -- a period most don't associate with anything close to reasonable stock valuations. But here's another way to look at it: Going all the way back to 1992, shares have traded, on average, at about 28 times earnings -- roughly twice today's multiple. Has domestic growth topped out? Perhaps. But if you watched CNBC's recent Wal-Mart documentary, you know this company isn't slowing down, with tremendous global expansion in areas like China, where Wal-Mart's footprint is just starting to set in.

You take it from here
Have your own take on any of these companies? More than 140,000 investors use CAPS to share ideas and swap opinions. Click here to check it out and speak your mind. It's 100% free to participate.

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