3 Ridiculously Cheap, High-Quality Companies

Of all the insights I've heard over these 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."

I get it. Even with the recent rally, the economy remains wrapped in a great big bundle of failure. Many companies that overleveraged their balance sheets -- AIG (NYSE:AIG), Citigroup (NYSE:C), etc. -- are permanently impaired and will never fully rebound. We had an unprecedented boom; now we're crawling out of an unprecedented bust. That's how markets work.

Even so, history tells us time and time again that the good gets thrown out with the bad in times like these. Using the wisdom of our 140,000-member-strong CAPS community, I've hunted down a few dirt cheap, high-quality companies:

Data from Yahoo! Finance and Motley Fool CAPS, as of Nov. 11. TTM = trailing 12 months.

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

A closer look at Western Digital
Back in January, CAPS member FoolSolo wrote:

[Western Digital] is a value leader in virtually every screen I run. They have a pile of cash, they generate a lot of cash, they have minimal and easily servicable debt, and they sport a PE of just 2.7. This is just unexplainable given profit margings of 12%, ROE > 43%, and healthy earnings despite the economic downturn.

Darn right. Investors willing to put money on that wacky valuation have seen Western Digital shares rise more than 230% this year.

But even after an explosive rally, are shares still cheap? I'd venture to say they are. Net income in the most recent quarter grew 36%. Average analyst expectations are for this company to grow more than 8% a year for the next five years -- not meteoric growth, but nice nonetheless. Yet shares still trade at no more than eight times next year's earnings. Still growing. Still cheap. I'd take that bet.

A closer look at Altria
As my colleague Alex Dumortier recently noted, large-cap stocks are back in vogue. That's given a nice boost to cigarette giant Altria Group, but I think shares are still a buy. The 7.2% dividend -- raised every year for the past decade -- in itself is enough to provide investors with reasonable long-term returns.

Now, plenty of people say Altria will be squashed by regulations and hammered by lower smoking rates. But if you can find a period since about 1970 that this wasn't a raging fear, let me know. And if you can find a period during that time in which Altria hasn't made shareholders filthy rich, let me know, too. As CAPS member MizzouFanVan writes:

Just raised the dividend again in August - now it is yielding 7.5%. Stock has recovered, but not overvalued - a stable, large cap stock selling for under P/E of 12 is a pretty safe play. Don't forget - you can run all the anti-smoking ads you want in the U.S. - but the people of the world love to smoke.

If regulatory challenges really make you cower, check out Philip Morris International (NYSE:PM).

A closer look at Hewlett-Packard
You've probably heard that Hewlett-Packard is buying 3Com (NASDAQ:COMS). The company also preannounced fourth-quarter results that didn't disappoint -- earnings of $1.14 per share, excluding restructuring and merger charges. In the first quarter of next year, HP expects to earn $1.03 to $1.05 per share. These aren't trivial figures, and they equate to a stock trading at no more than 11 times forward earnings. If you expect a moderate run-up in computer sales based on pent-up demand, a high-quality company like HP, trading at an 11 multiple, ain't bad looking.

You take it from here
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