What's Cheap Now?

It's especially difficult for investors to keep a good stream of ideas flowing into the top of the funnel. Let's face it -- there are a zillion companies out there vying for your investment bucks. As the markets continue climbing, I find myself retreating more and more into cheap mode, seeking only stocks trading at a discount. That means I look for some indicator of cheapness at the very beginning of the process, and computerized screening is one of the best ways to do that.

Last October, my "stealth value" screen produced an interesting array of companies, three of which delivered solid returns between then and this week. Alas, the best performers weren't among the companies I thought would be among the best prospects, and overall, the entire group lagged the S&P 500's returns over the same period (as represented by the SPDRs).

Granted, four months isn't much time for value to emerge, but I was encouraged enough by the lack of real losers in that bunch to continue using the original screen, or variations on it.

Consumer twist
More recently, under the influence of Jeremy Siegel's The Future for Investors, I've been trying to locate cheap stocks in specific sectors. As Siegel's research has shown, outperformance has tended to occur most often in consumer staples and health care. To lesser degrees, the energy and consumer discretionary sectors also have provided better-than-index returns over the period covered by his research.

With that realization in mind, I recently began screening for values in the consumer non-cyclical sector. I tweaked the stealth value screen to find companies that met the following criteria.

• Part of the consumer non-cyclical sector.
  
  
• Growth in earnings per share between 10% and 30% over the past five years. I wanted to get rid of companies whose high growth would be more likely to attract crazy money, but I also sought companies with a track record of steady growth.
  
  
• A price-to-earnings (P/E) ratio between 8 and 25. Given the growth rates above, companies trading at this ratio fit into a broad definition of "reasonable."
  
  
• Trading at a 20% discount to its average P/E ratio over the past half-decade. No reason to pay full price if the market will hand us a deal, right?
  
  
• Market capitalization of less than $10 billion. I'm more interested in slightly smaller companies. Behemoths can grow, too, but it's tougher for them to find room to run.

My updated version spit out the following companies this week:

Yankee Candle, perhaps I should not have maligned thee. It shows up here and on my original screen, and it's turned around nicely.

I'm still not sure that scented wax, however charming, counts as a true consumer staple. However, the rest of these companies all fit the bill. Most are household names in the U.S., though several are not. But they may be household names in other countries. This is a pretty interesting development, especially in light of Siegel's recommendation that U.S. investors look beyond our borders in the years ahead. (He actually recommends up to 40% of investments in non-U.S. stocks.) Because I also think that the rest of the world is going to offer great growth potential for the right companies, I'm most interested in the foreigners up there, several of which merit a closer look.

Multinational booze
Diageo may be headquartered overseas, but its brands such as Guinness, Bailey's, and Captain Morgan are well known here. If you're looking for a cheap way to invest overseas, there may be no better vehicle than this firm, which sells in 180 foreign markets. With solid brands, products in perpetual demand, robust free cash flow, and a 4.3% dividend yield, Diageo strongly resembles the long-term winners that Siegel highlights in his book -- even if you buy at today's prices, which look close to fair.

Tortilla titan
Gruma is similar to Diageo in its market lock, though its products are a lot more wholesome: It's the world's leading tortilla producer. Based in Mexico, the firm has leveraged solid, but not stellar, revenue gains into EPS growth of 260% between the years ended 2001 and 2004. A solid lock on an expanding market and a history of good free cash flow make this company worth adding to a watch list, if not a portfolio. By a back-of-the-napkin cash-flow analysis, Gruma looks like it's selling anywhere from fair price to a 20% discount.

South American Coke
Embotelladora Andina is something of a Coke play; it's one of the largest Coca-Cola bottlers south of our borders. In fact, it's the only source for Coke soft drinks in Chile, and its subsidiary in Rio de Janeiro is the exclusive bottler and distributor in Brazil. It also produces bottles for use in its beverage operations, and it distributes a variety of other drinks, including beer. On a cash flow basis, shares don't look exactly cheap to me, but given its rising margins and investment returns, my quick appraisal of its profitability may not reflect the real potential here.

Foolish bottom line
While Siegel's research has shown that consumer staples are among the best-performing stocks, the experience of many multinationals that I follow has also shown that the reasons for their outperformance (brand loyalty, relative insulation from economic swings) apply just as strongly in overseas markets. Coupled with strong cash flows and (ideally) a nice dividend yield, foreign consumer staples should be competing for a position in any Fool's portfolio. You could do a lot worse than starting your search with the list above.

Diageo has already been a stellar performer for Motley Fool Income Investor , which has write-ups on several solid, cash-producing foreigners. Sign up today for a free 30-day guest pass.

Seth Jayson is always on the lookout for a deal and figures he'd better shop overseas more often. Send your underappreciated foreigners his way by clicking that email link. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. Coca-Cola is a Motley Fool Inside Value recommendation. Fool rules are here.