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Safe and Cheap Stocks? Good Luck

It's tough to find stocks that are both cheap and safe.

For any stock investor, the dream investment is to buy into solid companies--companies with strong balance sheets, high cash flows, good managements--at bargain prices. Coca-Cola (KO) for $30 a share (instead of the $55 it trades for today). Or Berkshire Hathaway (BRK.B) for $1,500 (as opposed to $2,300). Alas, we rarely find many investments that qualify as both safe and cheap. And these days it's especially tough. 

You can define a safe company in a number of ways, but let's look at companies withlow Morningstar risk ratings, which you can find next to our stock star ratings. Our analysts assign risk ratings by scoring companies in a variety of categories, including debt levels, ability to generate cash flow, and the cyclicality of their businesses. Out of the 500-odd companies Morningstar rates, less than 70 earn a low risk rating, so it's a rather select group. It includes companies like Coca-Cola, Berkshire Hathaway, Merck (MRK), Paychex (PAYX), Southern (SO), and Wal-Mart Stores (WMT).

How many of these low-risk stocks earn 5 stars--our designation for stocks that trade 30% or more below fair value? Not a single one. And only 10 of these stocks earn 4 stars.