Now is a fantastic time to be a value investor, and it's an even better time to be a growth investor. Super investors such as Buffett, Greenblatt, and Fisher did well buying growing companies for rock-bottom prices. These guys weren't just buying outrageously cheap stocks, they bought growth potential on the cheap.

But how do you find them?
My favorite method for finding cheap growth stocks is to use the PEG ratio. The PEG ratio tells you how much you are paying for the expected long-term growth. If a company has a PEG of 1, then for each point of growth you are paying one times earnings. But if growth expectations are higher than the P/E, the PEG dips below 1 and you are getting more bang for your buck!

Now, the fun part
With that said, here are seven cheap stocks with great growth potential that are also highly rated by our 115,000-plus-member Motley Fool CAPS community.

These stocks have:

  • Expected five-year growth rates above 10%
  • P/Es below 20
  • PEGs 0.8 or below
  • Top ratings (four or five out of five stars) from our community of investors

 

Estimated 5-Year Annual Growth

PEG Ratio

CAPS Rating

Fools Saying Outperform

American Oriental Bioengineering (NYSE:AOB)

24.0%

0.25

*****

1904 of 1961

Boeing (NYSE:BA)

12.38%

0.75

****

3102 of 3397

China Medical Technologies (ADR) (NASDAQ:CMED)

40.1%

0.57

*****

1111 of 1140

Deere & Company (NYSE:DE)

10.5%

0.4

****

2096 of 2188

National Oilwell Varco (NYSE:NOV)

23.0%

0.29

*****

1926 of 1957

Suntech Power Holdings (NYSE:STP)

40.5%

0.5

****

3783 of 3902

Walt Disney (NYSE:DIS)

12.33%

0.8

****

3218 of 3487

Data from Yahoo! Finance, Motley Fool CAPS, and Zacks Investment Research as of Oct. 9, 2008.

While these aren’t recommendations, they are a great starting point for future research.

Finding value in growth stocks
So, are these beaten-down growers worth a look, or are their growth prospects illusory? Join our Motley Fool CAPS community to get more analysis on the above ideas, create your own list of undervalued growers, or even weigh in with your own expert opinion. Best of all, it’s absolutely free. If only the same were true with investing.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team invested $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Dan Dzombak enjoys Robotron 2004 too much. American Oriental Bioengineering is a Motley Fool Hidden Gems recommendation. Walt Disney is a Stock Advisor pick. Suntech Power is a Rule Breakers selection. The Fool owns shares of American Oriental Bioengineering. The Motley Fool's disclosure policy thinks of itself as undervalued, and it has no analysts following it to estimate its growth.