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Ten Deservedly Cheap Stocks

Just because these stocks are cheap doesn't mean they're safe.

If you’re a bargain-hunter, there’s a good chance you’re a bit frustrated. A lot of good companies--Dell Computer (DELL), Intel (INTC), Pfizer (PFE), Microsoft (MSFT), and Home Depot (HD)--were cheap a few months ago. In fact, in September we added each of those stocks to our Tortoise and Hare Model Portfolios, which appear in our monthly newsletter Morningstar StockInvestor. But most of these quality companies have bounced back and now trade at or above our estimates of fair value. Currently only about 20 stocks out of more than 500 that we rate are cheap enough to earn a 5-star rating, the designation we give stocks trading at a price at least 30% below fair value.

And as we spell out in the Analyst Reports for many of today’s high-rated stocks, the quality of some of these businesses isn’t high. As the market has bid up the price of quality companies, it’s left the mediocre merchandise in the bargain bin.

I used our  Premium Stock Selector to pick out such companies--companies whose stocks are cheap enough to earn at least a 3-star rating but that are bad or mediocre businesses. As a quick screen on the quality of the business, I used the three Morningstar grades--Growth, Profitability, and Financial Health--that are handy summaries of historical performance. A company with Cs and Ds in one or more of these areas is one with poor historical performance.