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

I got to thinking about this the other day when I was talking to an investor who was buying stakes in FUQI International (Nasdaq: FUQI) and Yuhe International (Nasdaq: YUII) -- two small Chinese stocks recently tarred by accounting restatements and an auditor resignation, respectively. Although serious questions surround both (and I am not buying either), he thinks they're outrageously cheap.

See, the whole market is up, and it's getting harder to find cheap stocks. That said, it should be clear that not all stocks that look cheap are cheap. So are there are outrageously cheap stocks out there that don't come with a side order of financial shenanigans?

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. No potential for massive writedowns.

Now there are only a handful of large 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 attract far too much investor attention to ever become really inefficiently priced.

You generally won't find as much interest among small caps, which is one of the reasons why -- given the criteria above -- Neutral Tandem (Nasdaq: TNDM), Ambassadors Group (Nasdaq: EPAX), and VSE (Nasdaq: VSEC) look outrageously cheap.



Net Cash on Hand

Cheap Because ...

Neutral Tandem


$179 million

The market has no understanding of the business.

Ambassadors Group


$81 million

Weak dollar and down economy have slowed international travel.



$8 million

Cyclical business staring down cuts in defense spending.

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

Yes, that last subhead was a Guns N' Roses reference
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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. Pfizer is a Motley Fool Inside Value recommendation. The Fool owns shares of Ambassadors Group and Neutral Tandem. The Fool's disclosure policy is decidedly un-outrageous.