(FORTUNE Magazine) – The buzzword in today's stock market is "relative value," which is not surprising. After 15 years of a bull market, the definition of value acquires a certain elasticity. These days a stock trading at 50 times earnings can be cheap in some views--as long as you can point to other stocks trading at 60 times, and as long as you're confident that some fool will be willing to take the stock off your hands at a higher price.

Well, don't count on it. In today's overstretched market, you need to put your faith in stocks that are reasonably priced in an absolute sense--stocks that trade reasonably close to their book value, or at a P/E multiple lower than a reliable long-term growth rate. Sure, such stocks are rare today. Some of the value-oriented money managers we spoke to told us they couldn't think of anything worth buying. But others did, and we present ten of their best ideas here.

You'll notice our picks fall into three categories. The group we call "badly beaten stocks" have some problems--a missed earnings target, say, or an outlook clouded by Asian troubles--and the market has overreacted to it. "Brands for less" includes three household-name stocks in temporary disfavor. And our "just plain cheap" group features stocks that for a variety of reasons Wall Street has overlooked.

You'll notice, too, that many of the companies we've chosen are small. That's because we think that large-company stocks have moved too far too fast recently. As a result, lesser-known stocks that pass muster by absolute measures of value may now be safer than their blue-chip cousins. To be sure, all the stocks on our list have blemishes. That's why they're cheap. Investing in them will take discipline, a willingness to act contrary to the crowd, and no small amount of nerve. But at least you'll have the assurance that your money is backed by real value.

BADLY BEATEN STOCKS

Home Health Corp. of America

Few industries offer brighter long-term growth prospects than health care. So why, you might ask, do these stocks end up in the trauma ward so often? Heap on the heavy hand of government, fast-changing technologies, and bad publicity, and you start to get a sense of why health-care stocks take so many blows and jabs. But for investors who keep their eye on the long-term trends, it's these temporary blows that offer some of the best ways to make money.

Among the more compelling opportunities right now is the hard-hit stock of Home Health Corp. of America (ticker: HHCA), a company that offers services like at-home nursing, intravenous nutrition, and oxygen therapy, as well as patient equipment like wheelchairs. Several factors account for the selloff in Home Health. Chief among them is the ongoing worry about reductions in Medicare oxygen-therapy reimbursement (a large component of many home-health companies' profits) and fears of other impending Medicare reforms. On top of that has come the blowup at Columbia HCA, causing investors to hit health-care stocks with a new round of sell orders. Home Health has lurched between $8 and $14, and currently trades at $9.

Jeff Petherick, who manages Loomis Sayles' small-cap value fund, says now is the time to get in. The stock sells for just 10.3 times June 1998 earnings estimates; analyst Ann Logue at Volpe Welty, another bull on the stock, predicts long-term growth in earnings of around 20%.

That's not a pie-in-the-sky forecast. Despite today's turmoil, home health is an over $35 billion industry and one that will continue to expand along with America's elderly population. Companies like Home Health, which have their publicly traded stock to use as currency, have a big advantage in consolidating this extremely fragmented business. (Over half the market consists of companies with only one office.) And Home Health, with 62 offices today, is well positioned. Though small, the company is the leader in its major markets--including Philadelphia, Boston, and Florida.

Of course, all the turmoil does pose additional challenges. In 1998 there will be a 25% cut in Medicare oxygen-reimbursement levels. Yet analysts estimate that oxygen therapy accounts for only about 5% of Home Health's revenues, so the cut will reduce its June 1998 earnings by just 5 cents. And CEO Bruce Feldman's experience--he's been in the health-care business since the 1970s and owns 8% of Home Health's stock--has helped him steer the company straight. Home Health has always run its Medicare business under the premise that someday Medicare would stop offering cost-based reimbursements to providers. Thus, it keeps average costs 20% to 25% below Medicare's standard reimbursement levels, according to analyst Logue.

A final kicker: Petherick points out that Home Health is still small enough to be a tempting takeover target for other industry players. Logue estimates a takeover value for Home Health of around $16 per share, based on recent acquisitions.

JLG Industries (JLG)

Value investors will tell you that just when the pounding on a stock seems at its worst, at its most brutal, that's usually a great time to buy. Of course, the hard part of that maneuver isn't only the nerve required to buy an unpopular stock, but also the keen sense to know when the worst is about to turn. In the case of JLG Industries, the turnaround has already started, but Wall Street has only just begun to notice it. JLG makes aerial work platforms--booms and scissor lifts that put workers and tools into the air, allowing them to fix lights on the ceiling of a stadium, service an airplane engine on a runway, or replace a hard-to-reach pipe at a refinery. Its booms, which resemble cherry pickers, can rise 150 feet. In fact, when Hillary Rodham Clinton topped off the White House Christmas tree with an ornament in a recent ceremony, she got there in a JLG boom.

Unfortunately, JLG stock hasn't behaved like one of its smoothly rising lifts. A onetime favorite of momentum investors and other growth-hungry types, shares of the company, based in McConnellsburg, Pa., plunged 40% last spring after it announced that earnings wouldn't match Wall Street expectations. Analysts sharply downgraded the stock, and the momentum managers bailed out; since then JLG's been stuck in the low teens.

In this case, though, the speculator's loss is the long-term investor's gain. That's because JLG's problems last spring came from a temporary falloff in orders, not a fundamental problem in its business. And while the past six months have been rough, the company is still very strong--it has almost no debt, a dominant share of its market, and a widely respected management team. Demand for JLG's platforms is being spurred by strong growth in the construction industry, both here and overseas, along with new U.S. government safety requirements that mandate the use of special equipment if workers are going to be more than six feet off the ground.

What's more, JLG is downright cheap. The stock is trading at less than 12 times estimated 1998 earnings, says analyst Laurence Baker of Legg Mason. He expects JLG to earn $1.10 next year, a gain of more than 46% from this year's depressed figure. Noting that earnings in the most recent quarter came in above expectations, Baker predicts that JLG's profits should recover nicely in the next year, pushing JLG shares to $16 within the next 12 months. Chuck Diller, the company's chief financial officer, confirms that orders are picking up following the slowdown this spring. JLG has already called back many of the employees it laid off, says Diller, who adds that any recent weakness in Asian markets has been made up by renewed strength in Europe.

William Lippman, manager of the Franklin Value fund, agrees that JLG is poised to bounce back. "For growth investors, a flat quarter is a disaster," he says. "For us it's nothing--no more than a temporary glitch. And if you can buy a great company like JLG at 12 times estimated earnings when the market is selling at 18 times, that's great."

Semiconductor Equipment Stocks

For most value investors high tech equaLs high wreck, and that has certainly been the case with semiconductor capital equipment manufacturers lately. The stocks of companies such as FSI International (ticker: FSII), KLA-Tencor (KLAC) and Silicon Valley Group (SVGI)--which make the machines that make semiconductor chips--are down as much as 47% from recent highs. These stocks were favorites of momentum investors, but now, during antimomentum times, they are being dumped, creating bargains in the process.

"The group has come down on fears of the Asian flu," says Deutsche Morgan Grenfell analyst Elliott Rogers. Investors are worried that capital constraints will cause Asian chip manufacturers to postpone the building of new semiconductor fabrication plants. While that will dent earnings growth for the big U.S. equipment manufacturers, it may not be as devastating as many investors fear. In fact, Morgan Stanley's Jay Deahna thinks that capital spending by semiconductor makers in Korea and Japan will decline only 10% next year, and that should be offset by strength in North America, Europe, and Taiwan.

The truth is that nobody really knows what will happen in Asia, but as uncertainty builds, P/E multiples contract. KLA's multiple, for instance, has come down from 28 to 15, on next year's First Call consensus earnings estimates; FSI's 1998 P/E is 16, down from 25; and Silicon Valley's has fallen from 18 to 12.

The hard choice for investors is deciding which of these stocks to own. Value guru Martin Whitman of the Third Avenue Value fund (average annual return since 1990: 23%) has bought a basket of them. Whitman hastens to add that he is not making a market-timing call ("I'm into finance, not abnormal psychology," he says), but he figures that since all the equipment makers are cheap, owning a lot of them is a good way to spread the risks. If you're narrowing down the list to one, make it Silicon Valley, now at $24 a share. Reason: A third or more of KLA's and FSI's revenues come from Asia, but Silicon Valley derives only about a tenth of its $595 million in annual sales from the region.

Moreover, Silicon Valley is poised to break away from the pack over the next two years as semiconductor production shifts to 0.25-micron chips (the number refers to the width of the lines that make up the chips' circuits). The company already makes the equipment that prints 0.25-micron circuit designs onto the surface of chip wafers, and as of December, it had the only production-ready machine in its class. Rogers expects earnings to triple by 1999.

Finally, Silicon Valley has $207 million in cash--which works out to $7 per share--and trades at only 1.4 times book value. (Whitman prefers to pay no more than 1.8 times for high-tech stocks.) FSI is trading at 1.5 times book and KLA at over three times.

BRANDS FOR LESS

Viacom (VIA)

A company's brand can be its most valuable asset--and during the past decade, as this essential fact has become increasingly obvious, companies with great brands have been amply rewarded by the stock market. But sometimes their stocks fall on hard times--or become undervalued by the market. Of our three brand-name companies trading at bargain prices, the one that seems to be facing the biggest problems is Viacom, the entertainment conglomerate that owns MTV, Nickelodeon, Paramount Pictures, Simon & Schuster, and Blockbuster Video. But, of course, that is also why it has the most potential.

Although Viacom's stock has been on a bit of a tear since the October market slide--it has gone from $28 to $35--it's still very cheap: its book value is $33 a share, and it currently trades at 9.2 times Schroder analyst David Londoner's cash flow estimates, compared with 13 times for Time Warner and 14 for Disney. (Entertainment analysts tend to concentrate less on earnings than on operating cash flow.) Indeed, Londoner thinks that a year from now,Viacom's stock should be trading at 12 times cash flow. That would make it a $45 stock.

Why has Viacom been such a laggard? Although it has had a series of problems in the past few years, the biggest one right now is its Blockbuster unit. Last spring Viacom was forced to take a $323 million charge to write down Blockbuster inventories and close some international stores. In effect, though, the market is now saying that Blockbuster is worth zero. As Rick White, co-manager of Salomon Brothers Investors fund, says, "I think the underlying businesses are easily worth $34 or $35 without the wart [of Blockbuster]. Then you say, 'How bad can the wart be?'"

In fact, despite its problems, Blockbuster is expected to generate $400 million in cash flow next year. In addition, John Antioco, who was hired last June to turn the business around, is a regular Mr. Fix-It, having brought Circle K out of bankruptcy before heading up PepsiCo's Taco Bell unit. Antioco is putting into place tighter inventory controls, pushing authority down to local stores, and throttling back on store expansions. He is repositioning Blockbuster from an engine of growth to a steady cash cow.

Viacom bulls believe that Antioco will make the market appreciate the intrinsic value of Blockbuster's business. Then investors will pay attention to the more successful Viacom brands, such as MTV and Nickelodeon. For his part, Londoner recently upgraded Viacom to his highest rating. Some might say Viacom still needs to prove itself. But Londoner replies, "You want to be in these stocks before the good things are widely recognized."

IBM

A couple of years ago, when IBM was still recovering from its near-death experience, perhaps it was a more obvious value pick. But how could Big Blue, up 46% this year to an all-time high, be a bargain now? The reason is that even after its 1997 run-up, IBM stock is still trading at a big discount to its tech brethren. In addition, its P/E of 15 is below that of the average S&P 500 stock--even though some observers expect IBM to continue to post above-average earnings growth in the coming years.

What's more, if you dig a bit, you'll discover that IBM owns some big, fast-growing businesses that don't always make the headlines. Its disk-drive unit, barely visible a few years ago, now generates an estimated $3 billion in revenue, putting it in the top ranks of the industry. Sales of IBM software actually exceed those of Microsoft. And IBM's tech-services unit has been growing 23% annually and recently passed EDS as the leader in the field.

Add up all the pieces of the IBM empire, says Salomon Smith Barney analyst John B. Jones Jr., and IBM shares are worth roughly $130--20% higher than their recent price. The company is also generating over $5 billion in free cash each year, a big chunk of which is earmarked for a huge stock-buyback plan. Not only does the repurchasing move provide a cushion for the stock in a rough market, Jones says, it will also enhance future earnings growth.

To be sure, not everyone on Wall Street agrees. Some tech analysts still regard IBM as a dinosaur, albeit a faster-moving, quicker-thinking one. That doesn't bother Tim Ghriskey, who manages more than $4 billion for the Dreyfus family of mutual funds. "If everybody loves something, then I don't want it," says Ghriskey, who explains that the Street's wariness of IBM gives it more potential than such tech darlings as Microsoft or Intel. Ghriskey notes that IBM chief Lou Gerstner, who recently signed on for another five years at the helm, is still restructuring. Says Ghriskey: "There's a huge amount of cost cutting that can still be done and that will go straight to the bottom line."

Aetna (AET)

Why is the health insurance sector so cheap? That's easy--because it's in turmoil. With medical costs rising faster than premiums, earnings at many insurers have tanked. Of the stocks that have been hammered, perhaps the most compelling value is Aetna--a national brand in a consolidating industry.

Health insurance stocks can be quite volatile because their earnings are tied to short-term margin swings. The typical net margin of a health insurer is around 3%, so if pricing is just a little low or expenses just a little high, earnings can suffer substantially. Aetna encountered exactly this fate by allowing medical costs to get too far ahead of the premiums it collects from customers. As a result, its stock dropped 32% from its August high.

Indigestion from last year's acquisition of U.S. Healthcare is partly to blame for the higher costs. As Aetna started trimming its various customer service centers from 44 to the current 26, the upheaval created a backlog of unprocessed claims. Claims data are crucial because they are used to determine cost trends, and thus to make pricing decisions. Aetna was unable to properly monitor its medical expenses and ended up taking a $103 million charge in the third quarter to beef up its reserves.

About half of Aetna's customers were able to take advantage of this mispricing opportunity and have already locked in their contracts. Clearly the stock price reflects that bad news. The question going forward is, How much of Aetna's business will continue to be affected by inaccurate pricing? The answer depends partly on what will happen to medical costs--because the more costs go up, the tougher it will be for Aetna.

Opinions on this subject vary. Bear Stearns analyst Gary Frazier thinks the U.S. is on the "brink of a renewed period of health-care inflation." Salomon Smith Barney's Geoffrey Harris, on the other hand, is not so worried because he believes HMOs and insurers will make up for high medical costs by increasing premiums en masse. "At some point in 1998," he predicts, "the tide will turn toward stable and improving margins." He rates Aetna an "outperform."

At $78 a share, Aetna's stock is trading just a little above its book value of $71 a share. Analysts expect earnings to improve from $4.35 a share this year to $4.71 next. In addition, the company's debt-to-capital ratio is a low 20%, and it is repurchasing more than one million of its own shares every month. Besides, with nearly $14 billion in revenues for the nine months through September and 14 million people under its coverage in 26 states, Aetna has staying power. The only other insurers with truly national scope are Cigna, United HealthCare, and Prudential HealthCare, which is reportedly up for sale. There is a chance Aetna may muddle its next few quarters, but even Bear Stearns' Frazier admits, "Aetna will emerge as a powerhouse two or three years from now."

JUST PLAIN CHEAP

CDI Corp. (CDI)

Some of today's stock bargains aren't household-name companies in disgrace or onetime hot tamales that had to get clobbered to get cheap. Some stocks just never were expensive because they never got onto investors' radar screens--or in other cases, Wall Street made up its mind about a company years ago and hasn't noticed that things have improved.

That kind of outdated judgment explains why temporary-staffing agency CDI Corp. made our list of bargains. The nation's fifth-largest player in an industry that has been growing at 20% a year, CDI sells for just 16.6 times next year's earnings. That's 17% off the company's estimated earnings growth rate and a roughly 25% discount to the P/Es of peers. It's a "sleeping giant," says analyst Nancy Moyer at C.E. Unterberg Towbin.

The main reason CDI missed the Street's love fest with staffing companies is its historical business mix. In 1990, $320 million of the company's $921 million in revenues came from its automotive services division. Investors pigeonholed CDI as a cog in the auto industry and priced it like a cyclical stock. Though CDI is reinventing itself--by year-end 1995, 75% of revenues came from other, much faster growth areas--Walter Garrison, CDI's CEO since 1961, did little to make the Street take notice.

Now that's all changing. Garrison retired in April; his successor, Mitch Weinick, who previously ran Ameritech's $4.7 billion consumer services division, actually likes pitching CDI's prospects to potential investors. Analysts are waking up: Prudential Securities just began to cover the company with a buy rating. As for that poky old automotive business, the last piece was sold in September. The company's remaining three divisions, which should generate a total of $1.5 billion in revenues in 1997, include the nation's largest provider of technical staffing (engineers and information-technology specialists), the world's largest search and recruiting business, and a smaller clerical division. Increasingly, companies seeking temporary help need mission-critical specialists, not just low-skilled types for overflow administrative work. That change plays right to one of CDI's competitive advantages: It is one of the few staffing companies that can provide both engineers and IT specialists, drawn from a total pool of more than 30,000 temporary workers.

Cash flow should reach more than $60 million this year, and the company's balance sheet shows low debt and a return on equity well over 20%. Analyst Kevin Dyches at Prudential Securities expects 20% internal earnings growth over the next five years. He thinks fair value for CDI is $55 per share, up 22% from the current $45.

DRS Technologies (DRS)

High tech isn't a place you frequently find bargains. After all, stocks in this group often sport P/Es double or triple those of the typical company--that is, when they make money at all. Some of the hottest technology names these days are years away from real profits.

DRS Technologies, on the other hand, is making real money. And it's trading at only 13 times estimated 1998 earnings. Not only is that a bargain multiple for a rapidly growing tech company, it's also 40% less than the average small-cap P/E. What gives? Well, the Street is only just beginning to discover this small maker of defense-related electronics. That's fine with us. Because as demand grows for DRS workstations, weapons targeting systems, emergency locator beacons, and other products, it's a good bet more analysts and money managers will notice. Now in the third quarter of its fiscal 1998, DRS is on track to earn $1 this year, up from 84 cents in fiscal 1997. Analyst Ashish Thadhani of Ladenburg Thalmann says DRS should earn a $1.25 per share in 1999 as recent acquisitions pay off.

What's more, the company is expanding its sales to civilian customers, reducing its dependence on always iffy military budgets. For example, sales of specialty magnetic heads, which read information off sources like ATM cards and airline tickets, now generate 20% of DRS revenues. This high-margin business, Thadhani says, could triple in the next three to five years.

Of course, plenty of small-cap companies promise big things. But DRS has something that makes its earnings prospects a lot more secure--a record backlog that now totals nearly $160 million and is still growing. Emboldened by that earnings visibility, Thadhani estimates that the company's fourth-quarter profits will be 50% ahead of last year's numbers. "That should really catch Wall Street's attention," he says.

Bob Rodriguez, one of the savviest value investors out there, agrees. The longtime manager of the FPA Capital and FPA New Income funds owns about 12% of the company's outstanding shares. "Within two years," Rodriguez predicts, "this stock could be trading at $20." It's now at 13.

Telephone and Data Systems (TDS)

If you buy Telephone and Data Systems (TDS) near its recent price of $46, you will get a well-tossed salad of telecom businesses and a management that seems to regard shareholders more as obstacles than as owners. But if you like to buy assets on the cheap, you may find the package irresistible. As analyst Steven Yanis of BancAmerica Robertson Stephens puts it, "It is pretty easy to see that the parent company trades for less than the sum of the pieces."

Well, not that easy. TDS is a mini-conglomerate made up of three publicly traded companies: U.S. Cellular, Aerial Communications, and American Paging. The company also has one wholly owned rural telephone company, TDS Telecom. The bulk of the company's $1 billion in revenues for the nine months ended last September came from U.S. Cellular (59%) and TDS Telecom (32%). To untangle the top layer of asset values in the company, you first take the current market value of the three publicly traded parts of TDS, add an estimate for the private telephone portion (by using a conservative multiple of five times operating cash flow), and subtract the debt. The sum, shown in the table below, comes to $54 a share--a 17% premium to its current price. And if you value the various parts at their private market value rather than at their depressed stock prices, you get even more. Renowned value investor Michael Price of the Franklin Mutual Series funds, who owns nearly 10% of TDS, figures the company would be worth around $90 a share if it were broken up and sold in pieces.

Why is there such a gulf between the intrinsic value of the company and its stock price? Mainly because of the company's majority owners, Chicago's Carlson family. LeRoy Carlson Sr. is the 80-year-old chairman, and his son LeRoy Jr., 50, is the CEO and president. During the past three years the Carlsons have built the company's assets from $2.7 billion to $4.7 billion, a 20% annual growth rate. The problem is that the company issued more than five million shares of stock during the same period to help pay for some of those assets, and its liabilities grew 35% a year. Meanwhile, the operating losses on Aerial's personal communications services business, still in its startup phase, have been eating into the cash flows of the more mature cellular and telephone units. Not surprisingly, the company's shares have gone nowhere. Ken Enright, a money manager at MFS Investments, another large investor, complains, "The Carlsons have to start marrying the value they are creating for the company to value created for the shareholder."

Price, for one, is not content to wait for them to do so, and last May he won a spot for a director on the TDS board. He would like to see a spinoff of the assets or a massive stock buyback. The Carlsons (who were not available for interviews before press time) cannot ignore the outside world forever. Says Larry Sondike, one of Price's lieutenants: "We are hopeful they will do the right thing."

Professionals Insurance Mgmt. (PICM)

As a brand name, Professionals Insurance Management Group may not have much magic, but the company comes with a valuation that's sure to entrance bargain hunters. Based in Okemos, Mich., PICM gets most of its revenues from providing malpractice coverage to doctors and hospitals in the midwest; it sells for just ten times estimated 1998 earnings. And with a 12-month trailing P/E of 10.6, PICM trades at well below half the multiple of the average small-cap Russell 2000 stock. Even better, PICM has little long-term debt and sells for only 1.2 times book value. Profits are also growing smartly. PICM, which earned $2.59 a share in 1996, is on track to earn $3.10 in 1997.

Then there's the acquisition story. The highly fragmented medical malpractice industry is rapidly consolidating, and PICM is quickly gaining more customers. In February the company is set to acquire Florida's Physicians Protective Trust Fund, which provides coverage to doctors in the Sunshine State. Not only will this move get PICM into a rapidly growing market, but it will also double the company's premium base. What's more, the merger will more than double PICM's outstanding shares to 7.6 million. With more shares available, says analyst Steven Schwartz of ABN AMRO Chicago Corp., mutual fund managers and other institutional players are likely to look more closely at PICM. At the moment, the stock's trading volume averages a sleepy 3,000 shares a day.

The Florida acquisition isn't the only big move on the horizon for PICM. In late 1998 or early 1999, PICM is expected to acquire Michigan Educational Employees Mutual Insurance Co. (Meemic), which should further boost PICM's premium base. Meemic, which sells auto and homeowner's insurance, will also help PICM diversify its product lines beyond the medical-malpractice market.

That deal is a year off, but now is the time to move on PICM--before it makes its move. "The reason this stock is cheap is that we're the only national brokerage house that follows it," says Schwartz. "Wall Street just doesn't know about this stock. But after the deal closes in February, people will notice."