This Quality Stock Is Trading Dirt Cheap

A good friend of mine recently told me that his financial advisor was ready to start buying stocks because he was finally convinced we're "in a bull market."

After waiting for nearly eight months to get in the game, now he's ready to buy.

My response: "Fire your financial advisor."

What?
First, let me explain myself.

I'm not here to sell you on a doomed market, but I would like to illustrate that it's no longer a buyer's market. This is, believe it or not, a bull market. Let me give you three good reasons I think so:

1. Investor confidence, a key factor in determining the upward trend that marks a bull market, has been on the rise. In fact, since its 2008 lows, the index has risen by 32% and now rests at a healthy 108.
2. The American consumer is back. Retail sales ticked upward in February. Not only have quarterly sales increased, but year-over-year, they've also increased by 3.9%. This means that people have more money in their pockets, and they're not just buying suits and iPhones -- they're buying stocks by the handful.
3. The S&P 500 has seen gains of 42% in the last year and recently hit a 17-month high.

"So what?" you're probably thinking.

Well, bull markets are great -- after all, a rising tide lifts all boats. It's just that there aren't as many bargains out there anymore.

Sure, at first, it was just turnaround stocks such as Sirius XM Radio and Las Vegas Sands that were seeing stellar gains. But now it's blue chips as well. Companies such as General Electric (NYSE: GE) and Caterpillar (NYSE: CAT) have risen in the last year by 67% and 107%, respectively. In fact, look at what five of the largest stocks of the S&P have done in the past year:

GE is trading at about 19 times earnings, which is pretty much in line with its P/E over the past five years. Yet as recently as December, you could have grabbed this monster conglomerate for about 3.7 times earnings. The same can be said for Caterpillar -- this star machinery master has sold for about 14 times earnings over the past five years. Now it's trading well above 38 times earnings!

I can't say that all the stocks listed above are overpriced -- Microsoft sports a P/E of 17, and P&G is trading for 15 times earnings. Both are pretty reasonable when considering their historical data.

But the bottom line is that while my friend's advisor was waiting for confirmation of a surging market, well, the market surged ahead! And now, stocks just aren't flying on the cheap anymore.

So what's a value investor to do?
John Neff, star investor and manager of the Vanguard Windsor Fund for more than 30 years, once said that "as bull markets progress, prevailing wisdom becomes a drumbeat that drowns out the argument for a low P/E strategy."

Well, I'm here to argue for that low P/E strategy.

You have to remember that half the battle of investing may be finding the right stock, but the other half is making sure you find it at the right price.

So in this type of market, you need to search high and low for value stocks -- companies that, for no good reason, are trading well below their true worth. Buying cheap means you don't have to time the market (like my friend's financial advisor) -- your only worry is making sure you purchased a great company at a reasonable price.

One angle you can use is to identify a company with a low P/E and then make sure to compare it with historical P/Es. Because maybe you found a stock trading for a multiple of 15, but if that's close to its historical norm, and the company's growth prospects haven't changed, then you haven't found much of a bargain. Target (NYSE: TGT) is an example; its 17 P/E is close to its eight-year average of 18.8.

Once you've found a stock that's trading below its historical P/E, then just make sure it has the other fundamentals -- sound management, a good balance sheet, room to run, and preferably, a solid yield. eBay (Nasdaq: EBAY) doesn't pay a dividend, but it otherwise fits the bill. Its current P/E of 15 is well below its historical average.

And that's what our analysts do at Inside Value -- they're constantly scouring the market for companies that have competitive advantages, that can provide long-term value, and, most importantly, that are trading at dirt-cheap prices.

If you like buying stocks at outrageous prices and high multiples, then please, by all means, start gobbling up stocks like it's nobody's business.

But if you're like me, and you appreciate a good sale and like buying stocks for less than they're worth, then Inside Value is probably the place for you.

This baby is dirt cheap
The folks on our team consistently find companies that fit this bill -- in fact, they recently recommended a company that's trading well below its worth -- Exelon (NYSE: EXC).

This company owns two utility companies in the Northeast, but its real bread and butter is power generation from its 17 nuclear reactors, which together account for 20% of U.S. nuclear capacity. It produces gobs of free cash flow and has a pretty wide moat, considering no company has started to build a nuclear plant since the 1970s. The best part is that it has all the classic characteristics of a value champion. It's trading at 11 times earnings, well below its five-year average of 31 times earnings. It has a reasonable debt/capital ratio, and because of all its free cash flow, it's able to fork out a solid 4.7% dividend yield.

Last but not least, because it's selling for such a reasonable price, our analysts see it trading for about 37% below its true value. And that's one of the many reasons it's one of our team's Best Buys Now recommendations.

Of course, you shouldn't just take my word for it and throw all your money into Exelon. That's why, to help you in your quest, I'd like to offer you a free 30-day, all-access pass to our Inside Value service. That way, you can get in-depth research on Exelon, plus full coverage of all our past and present recommendations, in addition to the seven stocks you need to "buy now." To learn more, simply click here.

Fool contributor Jordan DiPietro owns shares of General Electric and Exelon, which he also just publicly called to outperform the market in Motley Fool CAPS. Microsoft and Exelon are Motley Fool Inside Value recommendations. eBay and Apple are a Motley Fool Stock Advisor picks. Procter & Gamble is a Motley Fool Income Investor selection. Motley Fool Options has recommended a bull call spread position on eBay and a diagonal call position on Microsoft. The Fool owns shares of Procter & Gamble and has a disclosure policy.