The Cheapest Stocks I Know

As I'm a member of the Rule Breakers research 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 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 contracted, 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 hours away from the end 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 mostly in the teens isn't necessarily cheap, but dig a little deeper to appreciate what some of these companies are doing.

Giant Interactive came to the market just as appetite for Chinese growth stocks was waning earlier this year. Traffic is growing at IAC's Ask.com, though it hasn't been enough to make much of a dent in the leading search engines. Both Secure Computing and Websense are growing as more companies lean their way to protect their networks, though a softening economy threatens to slow IT spending. JAKKS Pacific has what may be this holiday season's hot toy with its EyeClops, but consumers are still wary of toxic playthings.

All five companies are growing, with analysts expecting healthy advances come next year. If you're looking for bigger, more familiar names, Oracle (NASDAQ:ORCL) is now fetching just 16 times next year's earnings, while Microsoft (NASDAQ:MSFT) is going for an eye-rubbing 17 times next year's projected profitability. It wasn't too long ago that both of these software titans commanded substantial market premiums.

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 16 times next year's projected profitability.
• A luxurious pampering services specialist fetching just 15 times forward profitability.
• One of the five stocks I mentioned earlier -- Secure Computing -- 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 $20.69 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.

Secure Computing 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. Microsoft is an Inside Value 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.