Now is a fantastic time to be a value investor, and it's an even better time to be a growth investor. Super-investors such as Buffett, Greenblatt, and Fisher did well buying growing companies for rock-bottom prices. These guys weren't just buying outrageously cheap stocks, they bought growth potential on the cheap.
But how do you find them?
My favorite method for finding cheap growth stocks is to use the PEG ratio, which tells you how much you are paying for expected long-term growth. If a company has a PEG of 1, then for each point of growth you are paying one times earnings. But if growth expectations are higher than the price-to-earnings ratio (P/E), the PEG dips below 1 and you are getting more bang for your buck!
Now, the fun part
With that said, here are two cheap stocks with great growth potential which are also highly rated by our 165,000-plus-member Motley Fool CAPS community.
These stocks have:
- P/Es below 15.
- PEGs below 0.8.
- Top ratings (four or five out of five stars) from our community of investors
|
Company
|
PEG Ratio
|
P/E
|
Est. 5-Year Annual Growth
|
CAPS Rating
(out of 5)
|
|
Marathon Oil (NYSE: MRO )
|
0.70
|
14.3
|
20.5%
|
*****
|
|
Transocean (NYSE: RIG )
|
0.71
|
5.8
|
8.2%
|
****
|
Data from Yahoo! Finance and Motley Fool CAPS.
Marathon Oil
With the market down about 10% over the past three months and concerns over Europe's debt crisis, China's slowing economy, and the BP spill still in the forefront of news, it's no wonder Marathon has gotten this cheap. For Marathon, it's all about the company's proven ability to increase production, build reserves, and keep costs low on the upstream side, while cashing in on industry-leading downstream capabilities. With a low valuation, a 3% dividend yield, and strong expected growth, the company seems like a good value proposition.
Transocean
Transocean's Deepwater Horizon rig was involved in the BP oil incident. The catastrophe has dropped Transocean's stock from around $90 to its current price in the low $50s. In addition to potential liability issues related directly to the Gulf spill, Transocean, along with drilling rig operators like Noble (NYSE: NE ) and Pride (NYSE: PDE ) , continues to face uncertainty regarding the deepwater moratorium on drilling. Anadarko Petroleum (NYSE: APC ) and Norwegian giant Statoil (NYSE: STO ) have both sought to exit some Transocean rig leases. Of course, with the drillers arguing that the rigs can, in fact, move to other regions or into shallower waters, it might prove difficult for any of those contracts to be broken.
Those who believe Transocean's liability in the incident will be minor, and that fears for the deepwater industry worldwide are overblown (most of Transocean's $11 billion in sales comes from outside the U.S.) will want to look into this company. These investors might agree, Transocean is a buy.
Finding value in growth stocks
So are these beaten-down growers worth a look or are their growth prospects illusory? Join our Motley Fool CAPS community to get more analysis on the above ideas, create your own list of undervalued growers, or even weigh in with your own expert opinion. Best of all, it's absolutely free. If only the same were true with investing.
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