Safe and Cheap Stocks for Cautious Investors

With the market's sporadic gains over the past few weeks, riskier fare is once again back in fashion. For the trailing six-month period ending March 20, 2003, Morningstar's speculative-growth category was the best performer of all eight stock types. The computer-hardware sector has also been on a tear, with gains of close to 30% over the past six months.

But after suffering painful losses for the past three years, many stock investors might be reluctant to dive back into the riskiest areas of the market. Fortunately, more-conservative investors can still find some opportunities in shares of stable companies that are still trading at reasonable valuations. Using Morningstar's  Premium Stock Screener, we searched our database to narrow down the field.

First, we restricted the search to stocks covered by Morningstar analysts, which limited the group to roughly 1,000 companies. To find companies with a low level of risk, we focused on company fundamentals, as opposed to quantitative measures such as beta. While beta can give you a good idea of how volatile a stock has been in the past, we think company fundamentals are a better gauge of how much risk you're taking on as an investor. Morningstar's stock analysts assign qualitative ratings for business risk for each of the stocks they cover, incorporating factors such as debt leverage, free cash flow, and the sustainability of operating cash flows and growth. We limited our search to companies with business risk ratings of below average, which cut the group down to fewer than 100 names.

Investors are generally willing to pay a premium price for safety, so it's usually tough to find reliable companies that trade at a discount. To make sure that our ideas weren't trading at excessive valuations, we also limited the field to stocks with 4- or 5-star Morningstar ratings.  Morningstar's stock ratings are based on the difference between a stock's price and our estimate of its fair value, so stocks trading at a discount are more likely to win a better-than-average rating.

All told, 26 stocks made it through the acid test. Here are some of the highlights:

 Federated Investors (FII)
Economic Moat: Narrow
Business Risk: Below Average
From the  Analyst Report: "Managing primarily money market funds, Federated is one of the more defensive asset managers. We would be happy to own a piece of this growing business at the right price. We think that the shares are worth $41 and that they are a bargain below $25."

 Novartis (NVS)
Economic Moat: Wide
Business Risk: Below Average
From the  Analyst Report: "Novartis is a keeper, in our opinion. The Swiss drug giant looks like a European version of  Johnson & Johnson (JNJ), with two thirds of its revenue coming from high-margin pharmaceuticals and the other third from health-care staples like vitamins, baby food, and foot fungus treatments. Novartis offers solid revenue growth with a healthy dose of stability, making it one of our favorites in the pharmaceutical industry."

 John Wiley & Sons (JW.A)
Economic Moat: Wide
Business Risk: Below Average
From the  Analyst Report: "High barriers to entry and high switching costs associated with its business afford John Wiley a wide economic moat. We think the shares are an outstanding investment below $24. In addition to its wide economic moat, we're attracted to Wiley because of its outstanding profits. Returns on invested capital have averaged 15% over the past five years, among the highest in the industry."

 Sysco (SYY)
Economic Moat: Wide
Business Risk: Below Average
From the  Analyst Report: "Though it may not have the name recognition of  McDonald's (MCD) or  Coca-Cola (KO), Sysco has built a formidable and profitable business as a middleman between manufacturers and the food-service industry. With $23 billion in annual sales and more than 400,000 customers spread across the United States and Canada, Sysco boasts economies of scale unparalleled in this highly fragmented field." 

To run this screen yourself and see all the stocks that meet our criteria,  click here. After clicking, you can save the screening criteria by using the "Save Criteria" button in the bottom right-hand corner of the screen.