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. The PEG ratio tells you how much you're paying for the expected long-term growth. If a company has a PEG of 1, then for each point of growth, you're paying one times earnings. But if growth expectations are higher than the P/E, the PEG dips below 1, giving you more bang for your buck!
Now, the fun part
With that said, here are four cheap stocks with great growth potential that also earn positive ratings from our 180,000-plus-member Motley Fool CAPS community.
These stocks have:
- P/Es below 20.
- PEGs below 0.8.
- Positive ratings (three, four, or five out of five stars) from our community of investors.
CAPS Rating (out of 5)
Data from Motley Fool CAPS and Yahoo! Finance.
Entropic Communications makes MoCA networking chips that allow consumers to easily connect their electronic devices to one another and the Internet. Shares plunged 38% one day in August after the firm missed guidance as large customer Verizon ordered fewer chips than expected. Analysts expect the number of TVs connected to the Internet to grow to 500 million by 2015, from 60 million today. That translates into an expected growth rate of 16.3% over the next five years. Now is a great time to get the shares on the cheap. Click here to add Entropic to your watchlist.
Southern Copper, like fellow copper miner Taseko Mines
Chimera is one of the market's highest yielding REITs as well as one of the highest yielding stocks. Both Chimera and its parent company Annaly Capital Management
Shipper or driller?
From its name, you would assume DryShips operates dry bulk ships, and it doesn't disappoint, with the largest fleet of any publicly traded dry bulk shipper. But recently, DryShips generated more revenue from its ultra-deepwater drillships than it did from its dry bulk business. SeaDrill
Investors have one thing to look forward to: The company plans on spinning off its Ocean Rig business in the next year or so. The company sold a 22% stake to investors in December for $500 million, valuing the oil rig business at just under $2.3 billion. Earlier in the summer, the company announced it would do a partial spinoff of 2% of Ocean Rig later this month, followed by a full spinoff at some point in the future.
The stock is down nearly 40% in the past six months. At this level, while the risks are high -- the company has a huge $3.8 billion debt load -- the potential rewards are high enough to warrant a speculative position. Click here to add DryShips to your watchlist.
Finding value in growth stocks
If you're looking for some other ideas for strong outperformers in the year ahead, The Motley Fool has created a new free report called "The Hottest IPO of 2011." In it, we reveal the little company set to profit from a big brands expansion into Latin America. Get instant access by clicking here -- it's free.
Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He owns shares of Annaly Capital, but holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Chimera Investment and Annaly Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.