Yes, You Can Still Find Cheap Stocks

Lots of stocks looked cheap three months ago. Now, though, after a powerful rally that has gone nearly nonstop since March, a quick look at the bargain bin reveals a less than compelling selection.

Experienced value investors have made fortunes over the years by picking the right times to buy beaten-down stocks, and those who managed the perfect timing of buying near early March's lows struck paydirt. The last U.S. automaker standing, Ford (NYSE:F), has seen shares rise more than 265% since March 9, while battered financials Citigroup and Bank of America (NYSE:BAC) have also tripled.

Now that those "obvious" bounce-back candidates have played out, where should you look next for value? Or is there simply nothing cheap left in the market?

Who missed the rally
Above all, value investors are contrarians, often swimming against the crowd in order to capitalize on opportunities that other investors ignore. So one natural place that you might look for good values is in the companies that really haven't seen big gains in the recent rally.

On that theory, I decided to comb through good-sized companies whose stocks still trade at reasonable earnings multiples below the market's average of around 13. I then narrowed down the results to include only those stocks that haven't seen the same sorts of big gains since March that most stocks have. The results included a number of interesting candidates for future research, such as the following companies:

Source: Yahoo! Finance, Motley Fool CAPS. P/E = price-to-earnings ratio.

Of course, just because a stock shows up on this list doesn't mean that it's automatically a good value. However, given the fact that many members of The Motley Fool's CAPS community believe that these stocks have solid prospects, it's worth a look to try to figure out why they've missed out on the ongoing rally.

Falling behind or staying ahead?
Obviously, several companies that have lagged the market can point to specific announcements that justify their underperformance. GameStop, for instance, has seen its once-lucrative niche market for used video games and game consoles finally attract the interest of competitors, and in a tough retail market, the company guided second-quarter earnings projections downward. Similarly, troubles with the IRS and fear of health-care reform have kept shares of Cardinal Health from participating in the rally.

With some of the other companies, though, recent underperformance masks longer-term strength in share prices. For instance, even though it's up only 7% since March, PG&E shares are actually up over the past year, as opposed to a loss of more than 30% for the S&P 500. Similarly, since mid-2007, Altria and Exxon have both held their own despite the weak overall market. They're down an average of 6% and 4% per year, respectively, with the S&P down more than 20% per year.

In other words, these stocks haven't lagged during the most recent rally because they're not good stocks. It's just that they never fell as much as the market in the first place -- so they didn't have to put in triple-digit returns just to get closer to breakeven.

Forget the rally
The takeaway from this is that you shouldn't focus on stock performance over short periods of time to judge whether a stock is a good value. Sometimes, stocks with amazing short-term returns will continue to outshine their peers for months or even years to come. Those that stay flat or fall when the rest of the market is rising may also continue to lag behind well into the future.

You won't find good value stocks just by seeing how their short-term returns compare to those of other stocks. How shares have done over three months is much less important than how a company's actual business compares to its competition. Only by looking at a company's long-term record and prospects will you find the best companies that truly are great values.

For more on value investing, read about:

• Buffett is still beating Bernanke.
• This company looks more like a short-sale candidate than a value stock.
• Don't Sell That Stock