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Traders speak on telephones while working on the floor of the New York Stock Exchange. (Lucas Jackson/Reuters)
Traders speak on telephones while working on the floor of the New York Stock Exchange. (Lucas Jackson/Reuters)

TheStreet

10 cheapest U.S. stocks with best growth potential Add to ...

Warren Buffett has been known to compare human emotions and behavioural tendencies in the stock market to a simple concept: hamburger prices.

Buffett, the most well-known value investor of all time, is usually amazed when stock prices fall so low: "When hamburgers go down in price, we sing the 'Hallelujah' chorus in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying - except stocks. When stocks go down and you can get more for your money, people don't like them anymore."

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In a recent story, I noted there could be opportunities, given the sour sentiment and drop in the stock market over the past several weeks. Although stocks have risen over the past few days, investors can still find cheap "hamburgers" if they look hard enough.

I used TheStreet Ratings' quantitative equity model and picked the highest-rated companies that have underperformed their industries over the past three months (by at least 7 per cent).

I also looked for companies that ranked in the top two quintiles (the lower, the better) of PEG ratio (price-to-earnings divided by expected earnings-per-share growth) within their sector. That would highlight companies that are undervalued relative to their peers.

So here are the highest-rated stocks for each of the 10 sectors, with returns as of June 20.

1. Alliance Holding is a diversified coal producer with mining operations in Kentucky, Indiana, Illinois, West Virginia and Maryland.

The stock has slumped 18 per cent in the past three months due to a secondary offering of 2.75 million shares, which was released in April for $52 a share. Shares are now trading $6 below the offering price.

Management has stepped up and put its own money to work with CEO Joe Craft buying $3-million worth of stock last week. The company pays a dividend of $2.22 (U.S.) a share, with a yield of 5 per cent. Alliance trades at a discount to other coal competitors at a P/E of 15. With expectations calling for 20 per cent growth, the shares look attractive. TheStreet Ratings has a $61 price target on Alliance.

2. Compass Minerals International is a provider of highway de-icing salt and specialty fertilizer. The salt segment for Compass currently comprises about 80 per cent of the overall business and is stable, yet slow-growing. The specialty potash segment (20 per cent of sales) produces sulfate of potash (SOP), which is used primarily as a specialty fertilizer for vegetables, fruits, tea, tobacco and grass. The SOP business has much better upside and should fuel growth for the company.

With margins expected to improve in 2011 and management investing to take advantage of improved potash pricing, the stock looks like a solid investment. TheStreet Ratings has a $115 price target on Compass Minerals.

3. AeroVironment sells unmanned, remote-control military aircraft and rapid-charging battery stations for electric vehicles.

The stock has fallen due to concerns over U.S. defense budget cuts. According to Benchmark Research, the company should do well because of growth in its electric-vehicle-charging business. "We will see major deployment of electric-vehicle-charging infrastructure in the coming year to support multiple electric-vehicle introductions and the White House's target of 1 million EV by 2015."

AeroVironment was recently named to a list of stocks by Goldman Sachs that have a 15 per cent probability, or better, of being acquired. Shares of AeroVironment rocketed 20 per cent Wednesday as quarterly earnings exceeded analysts' estimates. While the shares are not quite as attractive compared with when I first ran the screen June 20, they still have upside potential, given TheStreet Ratings $38 price target.

4. Rent-A-Center , the largest rent-to-own operator in the U.S., rents furniture and electronics to low- to middle-income customers.

The company has struggled in the past three months, underperforming its closest competitor, Aaron's Rents, by over 25 per cent. While Aaron's has executed flawlessly, Rent-A-Center has not, as the company missed earnings estimates. Management blamed the first-quarter fallout on poor weather conditions in February and limited availability of refund-anticipation loans for consumers. Despite the hiccup, management has stuck to its 2011 guidance of $2.90 to $3.10 in EPS, equating to revenue growth of 5 per cent to 7 per cent and earnings-per-share growth of 3 per cent to 10 per cent.

Key initiatives to boost growth, such as RAC Acceptance (kiosks in third-party stores that arrange rent-to-own programs) are in place. Management has done a good job of managing its debt position and recently boosted the dividend by 167 per cent (now at a 2.2 per cent yield). If management can achieve $3 in EPS for the full year, the stock looks cheap, trading at just 9.7 times earnings (a discount to 15 times P/E for Aaron's). TheStreet Ratings has a $41 price target on shares of Rent-A-Center.

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