Yes, the stock market has been on an incredible upward tear, but it's also produced a lot of volatility -- and left a lot of stocks behind. Are there any out there that are outrageously cheap?

I found one recently, and I got to thinking about the others out there when I read money manager Bill Miller's comment that "the market abounds with good value." Of course, Miller also wrote last August that stocks were the cheapest they'd been since 1991 ... and after a brief rebound, they went right on dropping (though the recent recovery has been nice).

But Miller did jump the gun, and his fund suffered last year because of core holdings in some deceptively cheap stocks such as Qwest Communications (NYSE:Q) and Expedia (NASDAQ:EXPE).

However, there are some individual stocks today that, for one reason or another, remain outrageously cheap.

Back up the truck, people
What makes for an outrageously cheap stock? Here's my short list:

  1. A balance sheet with lots of cash and little debt.
  2. An EV/EBITDA ratio less than 6. (That's enterprise value/earnings before interest, taxes, depreciation, and amortization.)
  3. A business with the financial strength and strategy to survive and thrive in a down economy.
  4. Low potential for massive writedowns.

Now, there are only a handful of large caps or mid caps that meet those criteria, so if you really want to build an "outrageously cheap" portfolio, you may need to start thinking of yourself as a small-cap investor.

Welcome to the jungle
In truth, large caps such as Merck (NYSE:MRK) attract far too much investor attention to ever become inefficiently priced. That $75 billion pharmaceutical giant is tracked by 18 sell-side analysts.

You generally won't find as much interest among small caps, which is one of the reasons why -- given the criteria above -- Jo-Ann Stores (NYSE:JAS), Tuesday Morning (NASDAQ:TUES), and Gaming Partners (NASDAQ:GPIC) look outrageously cheap.



Net Cash on Hand

Investors Scared Because ...

Jo-Ann Stores


$50 million

Tied to consumer retail spending.

Tuesday Morning


$0.3 million

Tied to consumer retail spending.

Gaming Partners


$18 million

Relies on orders from currently troubled casinos.

Data from Capital IQ, a division of Standard and Poor's.

Yes, that last subhead was a Guns N' Roses reference
We love being small-cap investors at Motley Fool Hidden Gems because it's the one area of the market where inefficiencies and a lack of Wall Street interest can make stocks outrageously cheap. And there's good reason to think that things will get better for all three of these stocks. Of course, in a down market like this one, that lack of efficiency can make for some gut-wrenching downside volatility.

But we're using current market conditions to recommend the market's best small companies -- stocks that should crush the market averages over the next decade or more.

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This article was first published March 14, 2008. It has been updated.

Tim Hanson does not own shares of any company mentioned. The Fool's disclosure policy is decidedly un-outrageous.