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Five Quality Companies at Good Prices

Most quality companies are expensive, but here are five that aren't.

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Among the companies we award star ratings to,a little more than 100currently earn a 4- or 5-star rating--our designation for stocks we think are at least 10% and 30% undervalued, respectively. A handful of those undervalued stocks belong to truly great companies. What do I mean by truly great? When deciding whether to buy stocks, I break down the stock universe into three broad categories:

1) The untouchables. These are companies whose stocks I'd never buy. These include startups and micro-caps (tiny firms with total market values less than $250 million or thereabouts), emerging-markets stocks, and companies that are too complicated for me to figure out. Investing in these is more akin to gambling than investing.

2) The great mediocre majority. These are all those companies whose stocks I'd buy if they were dirt cheap. If the margin of safety--otherwise known as the discount to fair value--is large enough, I'd be tempted. The less solid the company, the greater the margin of safety I'd require. Examples would be companies like Tellabs (TLAB), General Motors (GM), or AT&T (T), which I'd be willing to buy if they were more than, say, 50% undervalued based on what our analysts estimate their fair value to be. Once these middling companies rise to fair value, though, I wouldn't hesitate to sell.

Haywood Kelly, CFA has a position in the following securities mentioned above: TWX. Find out about Morningstar’s editorial policies.