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Your instant 3-share cheap portfolio

This is for the penny-pincher in all of us. When grocery shopping, maybe we look in the discount bins for bargains. At home we squeeze the last little bit of toothpaste out of the tube to get our money’s worth. We all want more for less.

Sometimes things are cheap for a reason. If they don’t have much potential growth in value, they could stay cheap for a very long time. With stocks, though, cheap doesn’t mean low quality. A dollar value that is considered high now may turn out to be very inexpensive in the future.

I have three cheap stocks here that offer good value and may satisfy our inner bargain hunter.

Medical centre and pathology centre service operator Primary Health Care Limited (ASX: PRY) is at a PE of 14.6 and has a dividend yield of 3.9%. Its FY2014 interim EPS growth was 8.7% to 15 cents per share. Both revenue and profits have risen over the past two years. It is forecasting FY2014 full year EPS growth to be around 7%-13%.

The company’s next big move is in the IVF fertility services market, where it could offer the same service for much less than the current average prices, thanks to its scale and expertise in the healthcare industry.  Fertility specialists could join its existing medical centre network and do business from there.

Now, if you want a cheap company that provides broadband and mobile services while still serving up a decent profit, then M2 Group Ltd (ASX: MTU) is the one. It has a PE of 13.8 when its industry average is 15.9 and its dividend yield is 3.7%.

It operates the Dodo and iPrimus internet service providers and the Commander voice and data service for business. With further integration of Dodo into the business system and new products like unlimited NBN broadband, it is gaining traction with lower costs and increased customer servicing numbers in the first half of FY2014.

Guidance for full year underlying NPAT is a 54% increase to around $85-$95 million. Cheapness, please meet earnings growth.

Aussie investors would love a good, cheap mining stock, so Fortescue Metals Group Limited (ASX: FMG) would fit the bill. It has struggled to get where it’s at now and it’s pushing on even further. Its PE is 5.8, while the mining sector average is 11.6. The dividend yield is 2.8%.

The low PE may reflect the market’s anxiety over the amount of debt it holds, but it recently paid its borrowings down by US$3.1 billion, which will save itself about US$300 million in interest expenses. Iron ore production capacity is ramping up and earnings are rising. At the same time, lower costs are widening profit margins, so it can reduce debt even further.

Foolish takeaway

Even a seemingly high current price may turn out to be a bargain for companies that are steadily growing profits.

Sometimes a company is marked down because of market concerns or perceived risks. Use the market’s short-sighted view to your advantage. Stick with companies that have decent growth stories. There is no need to speculate with small, unknown companies when these kinds of stocks are around us.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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