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'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 done with 2008, we're starting to get a handle on forward estimates for fiscal 2009. Let me run a few names past you. Tell me if you thought they were trading for higher forward multiples than they actually are.

Data from Yahoo! Finance.

Finding growth stocks with 2009 profit multiples running in the teens -- and even single digits -- isn't necessarily cheap in of itself, but dig a little deeper to appreciate what some of these companies are doing.

Sohu.com and Home Inns are cashing in on the world's most populous nation migrating online and traveling. Intuitive Surgical is updating operating room technology with its robotic surgical arms. BJ's is a casual-dining concept that is actually growing in an otherwise bleak niche. UnitedHealth is not calling in sick when it comes to managed care.

All five companies are projected to grow their bottom lines this year, with analysts expecting healthy advances beyond that. If you're looking for bigger names, tobacco giant Altria (NYSE: MO) is now fetching just 9.6 times next year's earnings. The undisputed champ of navigating the airways profitably, Southwest (NYSE: LUV) is now fetching a forward earnings multiple in the mid teens.

These are growing companies, yet they are fetching multiples that seem a better fit with sleepy utility stocks. 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:

• Three of China's biggest online multiplayer game makers, with ridiculously wide profit margins, trading for less than 10 times next year's projected earnings.
• A luxurious pampering services specialist fetching just nine times forward profitability.
• Two of the five stocks I mentioned earlier -- Intuitive Surgical and Sohu.com -- 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 $21.11 per share come 2009. Those who got into Google early snapped up a stake in the paid search giant for just four 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.

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 Feb. 15, 2007. It has been updated.

Longtime Fool contributor Rick Munarriz does not own shares in any of the companies in this story, save for Intuitive Surgical. UnitedHealth is a Stock Advisor and Inside Value recommendation, as well as a Fool holding. Intuitive Surgical and Sohu.com are Rule Breakers selections. The Fool has a disclosure policy.