7 highly rated stocks on sale

By The Motley Fool

I am always looking for a good deal, whether that means buying an extra box of Frosted Flakes when they're on sale or pouncing on undervalued stocks.

The idea that anybody would sell a stock for less than its worth may seem silly, but legendary value investor Ben Graham tells us, by way of allegory, how we can look out for these situations.

In "The Intelligent Investor," Graham introduces readers to a wacky guy named Mr. Market, who pays you house calls on a daily basis, offering to sell you interests in businesses he owns or buy interests in businesses you own.

Sometimes, Mr. Market will show up at your door very excited, offering you premium prices for your holdings. Other times, he'll be totally depressed about the future, offering to sell you what he has for as low as pennies on the dollar.

• MSN CAPS: Collective wisdom at work

To find some of the stocks that Mr. Market is depressed about, I've turned once again to our MSN CAPS investing community. Each of the companies below merited the highest rating (five stars) from our community of investors just 30 days ago.

As the table shows, these stocks are all still very well-regarded by the CAPS community despite their dismal performance over the past month. While these aren't formal recommendations, they could be a great place to kick off further research.

In the bargain bin?

Company	Sector	1-month decline	CAPS rating
Frontier Oil	Crude oil refining and marketing	24.7%	****
Eaton	Aircraft, auto and truck parts	17.2%	*****
Cognizant Technology Solutions	Business software	15.7%	*****
Chesapeake Energy	Natural gas	26.7%	*****
Foster Wheeler	Engineering and construction	21.9%	*****
EOG Resources	Oil and natural gas	23.7%	****
Anadarko Petroleum	Oil and natural gas	23.7%	*****

What investors seek

Good earnings, bad guidance. That's a phrase we're hearing this earnings season -- that is, for companies that managed to post good earnings. And just like President Bush trying to pronounce "nuclear," the phrase is likely to make people uncomfortable each time they hear it.

For industrial manufacturer Eaton (ETN, news, msgs), the earnings for the three months ended June 30 were $2.03 per share, an increase of 24% from the same quarter in 2007. The growth reflected a heavy dose of acquisitions –- the Cleveland company's primary growth driver -- coupled with organic growth and some benefit from exchange rates.

Meanwhile, Eaton's outlook was that the spike in oil prices would hamper demand for planes, trucks and automobiles. Consequently, the company lowered its 2008 earnings guidance by a whopping 3%. Investors took this like a belch at the dinner table and were tripping over themselves to sell.

But having a diversified business is a lot like visiting the food court at a mall -- if you're not in the mood for Chinese, you can help yourself to a taco or a hamburger instead. For Eaton, its auto segment (the company's smallest) was hurting, but other segments were looking pretty darn good.

It would seem that in a market like this, a company without exposure to mortgage securities or direct consumer spending should be what investors are seeking. Instead, shares of Eaton have been sold down to less than 10 times forward earnings.

• Video: Do your own homework

But if Mr. Market doesn't agree that Eaton's stock is a deal, the members of the CAPS community certainly seem to. The stock is rated an outperformer by 433 members, while just 10 think it will underperform the broader market.

Eaton recently received a thumbs-up from CAPS All-Star "reddingrunner," who thinks the stock is cheap and the company is poised for growth. "I'm a big fan of these industrial infrastructure plays; companies like Eaton and its competitors who provide the moving parts for the industrialization of emerging markets," reddingrunner wrote.

Do you think the recent decline in Eaton's share price has created a good buying opportunity? Or is there more downside ahead? Let the community know what you think -- head over to CAPS and share your thoughts with the 110,000-plus other players in the community. Even if you'd prefer to pass on Eaton, you can check out a couple of the other stocks listed above, or any of the other 5,500 stocks rated on CAPS.

This article was reported and written by Matt Koppenheffer for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.

Editor's note: MSN CAPS is an investor intelligence service hosted by The Motley Fool. Companies are rated by players to outperform or underperform the market and are subsequently ranked from one star (the lowest) to five stars. Between Jan. 3, 2007, and May 12, 2008, five-star companies outperformed the SPDR Trust, an exchange-traded fund that tracks the S&P 500, by an average of 9 points, annualized, while one-star companies underperformed by an average of 15.6 points, annualized.