7 Highly Rated Stocks on Sale

I'm always looking for a good deal, whether that means buying an extra box of Golden Grahams when they're on sale, or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than it's worth may seem silly, but legendary value investor Ben Graham (no relation to the cereal) tells us, by way of allegory, how we can look out for these situations.

In The Intelligent Investor, Graham introduces readers to a wacky chap named Mr. Market. Mr. Market pays you house calls on a daily basis, offering to sell you interests in businesses he owns, or to buy from you interests in businesses you own. Sometimes Mr. Market will show up at your door very excited, offering you premium prices for your holdings. At other times, he'll be inconsolably depressed about the future, offering to sell you what he has for as low as pennies on the dollar.

To find some of the stocks that Mr. Market is depressed about, I've turned once again to The Motley Fool's CAPS investor community. Each of the companies below had received a five-star rating (the highest) from our community of investors just 30 days ago:

Data from Motley Fool CAPS as of Feb. 16.

As the table shows, all of these stocks are all still very well-regarded by the CAPS community, despite their underperformance over the past month. While these are not formal recommendations, they could be a great place to kick off further research. I'll even get you started with some thoughts on Motley Fool Stock Advisor pick Double-Take Software.

Why so blue?
The lower-than-expected 2010 forecast bundled with Double-Take's fourth-quarter results started the stock's slide. However, Wall Street helped dig the knife in even deeper, when three brokerages came out with downgrades the day after the announcement.

Why so much pessimism from the Wall Street folks? The soft 2010 guidance was no doubt part of it, but analysts also highlighted the company's growth efforts. Specifically, they noted uncertainty over how consumers will respond to Double-Take's new products, and concerns that spending to launch those new offerings will depress the company's bottom line.

While I'm not usually inclined to agree with the notoriously short-sighted Wall Street analysts, I wasn't ecstatic about what I heard on the company's conference call. At the very beginning, management said that it believes the market doesn't value high margins and cash production as much as it values growth. For that reason, Double-Take announced plans to dive into new growth initiatives.

To me, this is a particularly worrisome view. As noted above, Mr. Market is an absolute lunatic; trying to base business decisions on his fickle tastes seems crazy. Business success comes via profits that can be reinvested if the opportunities and potential returns are right, or otherwise returned to shareholders. Successful management teams should know better than to buy into the public-market popularity contest.

Hopefully, management just misspoke on the conference call. Maybe it's investing in growth because it sees opportunities that will reward shareholders with outstanding returns. We can only hope.

What the bulls say
There's no shortage of optimism for Double-Take on CAPS, which shouldn't be all that surprising. The company serves an important and growing software niche, ensuring that data is both available and regularly backed up. Double-Take has grown like a weed in the past, generates a huge amount of cash, and currently has nearly $100 million in cash on its balance sheet.

Currently, more than 900 CAPS members have given a thumbs-up on the company's stock. That optimistic crowd includes CAPS member lytri, who thinks that the reaction to the fourth-quarter earnings report is just a short-term bump in the road:

Hit hard by weak guidance, but the company is no different. There's also a trend in companies to offload as much as possible and to keep increasing data exponentially. For the first time it's data storage instead of data security that's high on CIOs' lists. That means that backup is close behind.

Here's the important question: Has the recent drop created a good buying opportunity? Or will Double-Take's stock continue to struggle? Let the community know what you think; head over to CAPS and share your thoughts with the other 150,000 members. Even if you'd prefer to pass on Double-Take, you can check out a couple of the other stocks listed above, or any of the 5,400 stocks that are rated on CAPS.

Double-Take is choosing to invest its cash in growth, rather than pay out dividends. Is it possible management thinks that dividends are dumb? Let us know in the comments section below.