The S&P 500’s Best Bargains Right Now

Want to know the difference between a cheap stock and an undervalued one? A cheap stock is one that�s priced too low but is going to remain at depressed levels. A bargain is a stock that is priced too low but is ready to correct that problem.

It�s an important distinction to make simply because it adds a �right time� component to a �right stock� philosophy.

To that end, here�s a closer look at not just three of the S&P 500�s most undervalued stocks, but undervalued names with charts that have dropped some key bullish technical hints of late.

GameStop

If you think a stock always, or even just most of the time, reflects the underlying company�s value, think again. GameStop (NYSE:GME) shares soared from the teens in 2005 to more than $60 by late 2007, when console gaming was all the rage. Less than a year later, GME shares were back to sub-$20 levels.

The immediate assumption might be that the recession hit game sales hard. It wouldn�t be an accurate assumption, though. While a lack of new compelling titles might have crimped video game publishers, GameStop�s earnings and revenue continued to rise at that time. In fact (and here�s an irony), it might have been the nature of GameStop�s business — retail sales of used games — that made the company so fruitful during that time; used games sell for about half of what new games sell for.

Whatever the reason, it worked. Even if the stock hasn�t reflected it yet, earnings have continued to swell since 2007, reaching a record-breaking $2.47 per share over the prior four quarters. The stock�s also near a record low P/E of 8.75, though the market�s starting to put two and two together. For the first time in years, GME is making more forward progress than steps back, having punched through a major resistance line early this year, and surviving the recent pullback with a higher low.

Eli Lilly

On an GAAP basis, Eli Lilly (NYSE:LLY) might have took a hit in 2008 that lingered into 2009�s trailing numbers, but on an operating basis, this pharmaceutical maker has grown per-share earnings every year since 2005. It has cleared $4.25 per share during the past 12 months.

But the stock hasn�t really budged since 2008. Why? It�s not a valuation problem — any blue-chip name that trades at a sub-10 P/E ratio is anything but bloated. No, the hesitation is founded mostly on doubts about Eli Lilly’s future. By 2014, as much as two-thirds of the company�s current revenue is in jeopardy because of expiring patents.

So what�s changed in the past six months that�s lit a fire under the stock price? More specifically, why has the sideways range between $32 and $38 been replaced by a modestly bullish rising trading range that�s carried LLY above that prior ceiling?

The answer is investors can actually see Eli Lilly is doing something to replace the revenue it knows it�s going to lose soon. Just a few days ago it announced a $30 million investment in noncommunicable disease treatments, it�s mulling a partnership with Turkish generic drug maker Mustafa Nevzat Ilac Sanayii AS, and it has brought in reselling partners some Asian markets for its insulin drug Huminsulin. And these are just examples of key steps being taken — Eli Lilly has done even more to line up new revenue for the coming years.

More important, investors finally are starting to believe in Eli Lilly’s future again, which is why the stock is starting to move after a two-year-plus consolidation phase.

Microsoft

For years, critics have been saying Microsoft (NASDAQ:MSFT) is a dinosaur, shilling software nobody needs anymore, selling less-than-compelling console games and gaming systems, and providing tech services that its competition offers cheaper and delivers better. Yet Microsoft continues to be a cash cow, generating record profits during the past four quarters. If that�s a dinosaur, it�s a dinosaur with a bull�s horns. And at 10 times its trailing earnings, MSFT shares also are about as cheap as they�ve been in a decade.

And, as was the case with Eli Lilly and GameStop, the market finally is starting to see the light with Microsoft. After finding a floor at $24 since the early part of last year, traders are finally — well, almost — ready to unleash the stock. MSFT has been testing the boundary established by a falling resistance line that also extends back to early 2010 (currently at $27.50), and when and if it breaks, this long-pent-up bullishness could come gushing out in a hurry.

Worst-case scenario with Microsoft? You have to wait a little while longer while the support and resistance levels squeeze it a little tighter. The underlying value already is in place, though.