The Cheapest Stocks I Know

Because 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'm 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 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, but 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 just dipping into the brand-new year, 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 20s isn't necessarily cheap, but dig a little deeper to appreciate what some of these companies are doing.

Google continues to dominate the lucrative search-engine market. Apple keeps gobbling up market share in the computing and cell-phone realms. Southwest is the nimble air carrier that the legacy airlines wish they could be. China's SunTech is shining brighter than the sun in our solar-powered future. The Knot remains the brand to beat when it comes to online wedding planning.

All five companies are growing, with analysts expecting healthy advances come next year. Go out to 2009, and dot-com darlings like Google and The Knot are trading at earnings multiples in the teens. If you're looking for blue chips, Sun Microsystems (Nasdaq: JAVA) is now fetching just 14.5 times this year's earnings, while online auctioneer eBay is going for a reasonable 15.5 times this year's projected profitability. It wasn't too long ago that both of these tech bellwethers 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'll find:

• One of China's biggest online multiplayer game makers, with ridiculously wide profit margins, trading for less than 17 times this year's projected profitability.
• A luxurious pampering-services specialist fetching just 12 times forward profitability.
• A video game company attracting suitor attention that is still trading for less than 20 times this year's profit target.
• Two of the five stocks I mentioned earlier -- SunTech and The Knot -- continue to have bright futures and do, 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 $24.92 per share come 2009. Those who got into Google early snapped up a stake in the paid-search giant for just 3.4 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.

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

SunTech Power and The Knot are Rule Breakers picks. If you want to unearth the other "potentially cheap" stocks in the newsletter, punch in now for a free, 30-day trial offer.

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