5 Highly Rated Stocks on Sale

I am 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's game is to pay you house calls on a daily basis to offer 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 and offer you premium prices for your holdings, while at other times he'll be inconsolably depressed about the future and will offer to sell you what he has for as low as pennies on the dollar.

So 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 has been given one of the two highest ratings from CAPS members:

Data from Motley Fool CAPS as of Feb. 1.

As the table shows, 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, let's take a closer look at whether opportunity could be staring us in the face.

Why so blue?
Eagle-eyed investors may notice a theme among many of the stocks in the table above. Three of the five stocks -- Yongye, SmartHeat, and China Security -- are China-based companies, which is a distinction that alone would have had investors fawning over the stocks not all that long ago. But lately investors have gotten cold feet when it comes to many Chinese stocks -- particularly small caps.

The story of Rino International has a lot to do with investors' concerns over Chinese small caps. Though the sorry tale isn't concluded yet -- there's an ongoing SEC investigation -- what we do know is that the company said the financial reports from 2008 to 2010 aren't reliable and that it didn't actually enter into some contracts it said that it had. The company's stock was also delisted by the Nasdaq after it failed to provide the exchange with information it requested.

For investors, this has meant impressive losses. As recently as October, the stock was fetching more than $19 per share. Today, its pink sheets shares can be had for $2.55.

Other Chinese stocks -- including China Sky One Medical (Nasdaq: CSKI) -- have come under heat as investors have gotten panicky and short-sellers have started to smell blood.

Does this mean that the stocks above should be avoided? I've urged caution when it comes to Chinese small caps and many readers thought I was not only wrong, but perhaps an investing sissy. Frankly, I'm perfectly comfortable with that -- as long as I see good value in high-quality, global large-caps, I can live with being an investing sissy.

That said, the dark cloud over Chinese small caps may be creating a serious value play for investors that dig in to find the best of the bunch. Yongye, for instance, has been left trading at 4.9 times expected 2011 earnings -- a pretty ridiculous valuation for a company that grew its revenue more than 100% during the 12 months ending in September. Of the three above (Yongye, SmartHeat, and China Security), I'd feel a bit more confident on Yongye given the fact that the team at Motley Fool Global Gains has actually paid the company a visit in China.

Sticking in Asia, but moving over to Taiwan, GigaMedia is a great example of a serial disappointment. For a few years the company seemed to have a good thing going, but now the results are downright ugly, and it's back in a position of having to prove that it has a viable business model. In the positive column, the company does have an impressive balance sheet with a ton of cash and very little debt. The only question is whether that cash makes its way to shareholders or is squandered by management in an effort to turn the business around.

Picking a winner
Though the CAPS community has a high opinion on all of these stocks, that doesn't mean I have to agree. As I mentioned above, I wouldn't be surprised if Yongye became a rocket-shot from the group of beaten-down Chinese small caps. GigaMedia could be an interesting speculation based on its balance sheet. But if I were to grab one of the stocks from the list above right now, it'd be Agrium.

I originally picked Agrium for my CAPS portfolio back in September 2009 and the stock has gained nearly 80% since then. But if we can learn anything from BHP Billiton's desperate -- and eventually unsuccessful -- bid to take over PotashCorp (NYSE: POT), it's that traditional fertilizers are hot, hot, hot.

These companies actually have a number of tailwinds behind them right now. Commodities in general are soaring as investors anticipate Fed-induced inflation, worldwide food consumption is expected to grow drastically thanks to large emerging markets like China, and some alternative energy advocates are hot on plant-based sources.

CAPS All-Star leohaas painted a similar picture when he recently gave Agrium a thumbs-up:

The need for food in this world will only increase with increasing population and with developing nations getting richer. On top of that, good land is now being used to grow corn and sugar for ethanol and soy beans for bio diesel. All that land needs to be fertilized; hence my thumbs up on some of the best-known fertilizer producers.

I'm continuing to hang onto my outperform rating for Agrium in my CAPS portfolio. But here's the important question: What do you think? Head over to CAPS and share your thoughts with the other 170,000-plus members currently part of the community.

Agrium may be my favorite stock here, but my fellow Fools think they've found an even better stock. To find out their top stock for 2011, check out this free report.