7 Highly Rated Stocks on Sale

I am always looking for a good deal, whether that means buying an extra box of Cocoa Puffs 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 crazy 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 totally 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 Darwin Professional Underwriters.

Survival of the fittest insurer?
OK, so Charles Darwin never actually wrote the words "survival of the fittest," but he has been quoted as saying "In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment." This is certainly a fitting quote for nearly any business, but it applies especially well to the professional liability insurance industry that Darwin Professional Underwriters (DPUI) calls home.

Though the company just completed its IPO last May, it is hardly a protozoan. DPUI, which wrote its first policy in spring 2003, was formerly a subsidiary of Alleghany. For the year ending in December 2006, the company had $149 million in revenue and dropped about 11% of that to the bottom line. Its combined ratio dropped to 94.3% from 97.3% in the previous year as it continued to better leverage its expenses.

DPUI writes policies in three primary areas: directors and officers (D&O), errors and omissions (E&O), and medical malpractice. D&O insurance protects the insured against lawsuits and legal defense costs that arise from rifts with groups such as competitors, former employees, and shareholders. E&O is designed to protect the insured from claims of ethical or professional missteps by their clients. Finally, medical malpractice, probably the best-known of the three, protects doctors and other medical professionals from claims such as negligence.

CAPS All-Star weiwentg likes the outlook for DPUI and gives the following reasoning:

To profit, insurers need to be skilled underwriters, and they need to invest their float competently. Their experienced executives have demonstrated skill at specialty underwriting in other firms. As to investment, we'll see, but their executives didn't get this far by being idiots. Mind you, their leaders built a casualty insurance firm[, Executive Risk,] in the 1990s, and it got bought out at a big premium in '99. And then they started Darwin in '03, and Darwin went public in '06.

Darwin is aiming to be cheaper than anyone else, and to build long-term client relationships to better understand their needs. I don't think they have a moat yet, and they are operating in rather difficult markets. But their management has demonstrated previous skill, and I would take the risk that they can build a moat over time. In fact, I just purchased some shares.

Do you think DPUI is worth the risk? Or will it get knocked out by a fitter competitor? Let the community know what you think -- head over to CAPS and share your thoughts with the other 30,000 players who currently have a rating for having made seven or more picks. Even if you'd prefer to pass on DPUI, you can check out a couple of the other stocks listed above -- or any of the 4,600 stocks rated on CAPS.

More CAPS Foolishness:

• 7 Top Insider-Owned Stocks
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• 5 Dynamic Dividend Stocks

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out Matt's CAPS portfolio here, or tune in to his CAPS blog here. The Fool's disclosure policy taught Mims what it means to be hot.