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 eBay (NASDAQ:EBAY) and AES (NYSE:AES).

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 Procter & Gamble (NYSE:PG) attract far too much investor attention to ever become inefficiently priced. That $175 billion consumer goods giant is tracked by 21 sell-side analysts.

You generally won't find as much interest among small caps, which is one of the reasons why I profiled Net1 UEPS (NASDAQ:UEPS), Tutor Perini (NYSE:TPC), and Volcom (NASDAQ:VLCM) a few months back as outrageously cheap stocks given the criteria above. Since then both Net1 and Volcom have risen nicely, while Tutor Perini continues to look outrageously cheap -- and that's something to take notice of in a rapidly rising market.



Net Cash on Hand

Investors Scared Because ...

Tutor Perini


$221 million

Tied to commercial real estate

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.

To see our newest recommendations and top picks for new money now, click here to join Hidden Gems free for 30 days. There is no obligation to subscribe.

Already subscribe to Hidden Gems? Log in here.

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

Tim Hanson does not own shares of any company mentioned. Volcom is a Motley Fool Hidden Gems recommendation. Net 1 Ueps Technologies is a Rule Breakers pick. eBay is a Stock Advisor recommendation. Net 1 Ueps Technologies is a Global Gains pick. Procter & Gamble is a Income Investor selection. Motley Fool Options has recommended a bull call spread on eBay. The Fool owns shares of Procter & Gamble and Volcom. The Fool's disclosure policy is decidedly un-outrageous.