The Cheapest Stocks I Know

As I'm a member of the Rule Breakers newsletter team, few will confuse me for a deep-value investor. I prefer turnover to turnarounds. I define the C in DCF as "catalysts." I find more investing ideas in lists of heavily shorted stocks than among the fresh 52-week lows.

Despite all this, I am no spendthrift. I am passionately cheap. The catch is that I see great prices in growth stocks. I think that's important. Value investors may have been jumping all over real estate developers last summer, when they seemed to be trading at single-digit P/E multiples. What happened? Earnings crashed, multiples expanded, and homebuilder stocks fell even further.

I prefer to hitch my portfolio's wagon to stocks that are growing. You can try your luck at nailing the top and bottom of cyclical stocks. I won't. Why should I, when there are just way too many bargains out there from stocks that have consistently delivered the goods?

Five for the road
Now that we're knee-deep into the second half of 2007, we're starting to get a handle on forward estimates for fiscal 2008. Let me run a few names past you. Tell me if you thought they were trading for higher forward multiples than they actually are.

Finding growth stocks with 2008 profit multiples running in the teens isn't necessarily cheap, but dig a little deeper to appreciate what some of these companies are doing.

Intuit remains the leader in accounting software. NetEase and The9 are two of China's most popular providers of online gaming experiences. Priceline remains the travel portal with personality. THQ is putting out some pretty popular licensed video games just as consumers are warming up to lower-priced consoles.

All five companies are growing, with analysts expecting healthy advances come next year. If you're looking for bigger, more familiar names, Hewlett-Packard is now fetching just 16 times next year's earnings. You know who else is fetching just 16 times forward earnings? Altria (NYSE:MO). Tobacco may be taboo in some households, but Altria isn't having much of a problem growing overseas.

These are important growth stocks, yet they are fetching multiples that seem a better fit with sleepy utility stocks or predictably steady money-center banks. So how can these not be the cheapest stocks that you know, too?

I'm sorry: They're affordable.

Buying the right kind of growth stock
The companies that I consider -- heck, demand to be considered -- cheap are growing at incredible rates, yet they're priced as if they were only modestly above average. They also have a history of blowing past analyst profit targets, so the forward-looking estimates have a pretty good chance of being revised higher in the coming quarters.

That's where I want to be. Yes, Rule Breakers is a growth-stock newsletter service. Dig deep into the scorecard and you will find:

• A video game developer with some head-turning franchises, trading for less than 20 times next year's projected profitability.
• A luxurious pampering services specialist, also fetching just 14 times forward profitability.
• One of the five stocks I mentioned earlier -- NetEase -- that continues to have a bright future and does, in fact, look cheap in my book.

Growth stocks are the greatest value stocks I know. Remember when Google went public at $85 in the summer of 2004? Did you think it was overpriced at the time? If so, you weren't alone.

But no one knew that the company was positioning itself to earn $20.59 per share come 2008. Those who got into Google early snapped up a stake in the paid search giant for just 4.1 times next year's profits.

Getting in early on the right growth stocks is the key. Just your luck -- the growth-stock kissing booth doesn't have much of a line these days. Pucker up, my friend.

NetEase is a Rule Breakers pick. If you want to unearth the other "potentially cheap" stocks in the newsletter, punch in now for a free, 30-day trial offer.

This article was originally published on Feb. 15, 2007. It has been updated.

Longtime Fool contributor Rick Munarriz does not own shares in any of the companies in this story. Priceline is a Stock Advisor recommendation. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.