As an investor with a significant tilt toward value, I find few things more enjoyable than discovering a mispriced jewel that Mr. Market, for whatever reason, seems to be unimpressed with. Of course, the tricky part is being able to decipher between an authentic bargain and yesterday's trash.
So, with that in mind, and with the help of our community over at Motley Fool CAPS, I'll begin a weekly column that seeks to separate the valuable wheat from the worthless chaff. The approach is far from complicated and even borders on the elementary: I'll run a simple screen for five-star stocks (the highest possible rating a stock can get in CAPS) that have enterprise value-to-EBITDA (EV/EBITDA) multiples below 10. I'll be using EV/EBITDA rather than the more common price-to-earnings ratio, so that we can account for differences in each company's capital structure.
By running this screen, we'll zero in on statistically cheap stocks that, according to our CAPS community, have plenty of great reasons to trade at much higher levels. So without further ado, I'm proud to introduce our inaugural list of frugal five-star stocks:
|
Company
|
EV/EBITDA (TTM)
|
CAPS Bulls
|
CAPS Bears
|
|
Tata Motors (NYSE: TTM)
|
8.69
|
296
|
2
|
|
Deswell Industries (Nasdaq: DSWL)
|
8.45
|
28
|
1
|
|
Genco Shipping and Trading (Nasdaq: GSTL)
|
7.13
|
60
|
0
|
|
Canadian Natural Resources (NYSE: CNQ)
|
5.54
|
133
|
4
|
|
EOG Resources (NYSE: EOG)
|
5.48
|
57
|
1
|
The first thing you might have noticed about these stocks is that they're all relatively low-profile companies operating in unexciting industries. The list consists of a foreign automaker, a plastics manufacturer, a dry-bulk shipper, and two natural-gas producers. (Break out the trombones!)
Of course, the prices on these companies shouldn't come as a huge surprise, since Mr. Market tends to price relatively boring firms more cheaply than the rest of his more stimulating darling stocks. So you probably won't find any fuel-cell or ethanol stocks as part of the frugal five anytime soon.
But that's OK. Here's a quick summary of these mundane stocks and what some of our CAPS players are saying about them. You'll see that some of these bullish arguments are far from plain and ordinary.
Don't say Tata to this automaker
Tata Motors caught my eye simply because it's the largest automaker in India, with a significant lead in the nation's commercial-vehicle segment. Tata has benefited enormously from the rapid growth of the Indian economy, as reflected in its market-share dominance. Will the company be able to maintain its lead enough to make the current price a bargain?
One Fool certainly thinks so and also believes that the Indian government will play a major role. According to TMFKapurn:
The Indian government is putting forth great effort to expand and improve infrastructure throughout the country, including for the most part highway construction. I expect Tata to receive boosts in sales both from governmental contracts as well as the newly improved capacity for companies to utilize these roads. This should be a long-term winner.
All's well that ends Deswell
Deswell Industries is another foreign stock, but instead of making vehicles in India, this one manufactures plastic parts and components out of Hong Kong. Deswell's growth and operating performance have been anything but fantastic during the past year, but CAPS member tektan likes its balance sheet and the possibility of an eminent turnaround:
Sound cash position, no debt, new equipment coming on line. Continued demand for new electronics should finally begin to show positive results.
Trade or ship for a shipper?
Genco Shipping and Trading, an oceanic transporter of dry-bulk cargoes, is my favorite cheapo stock of the bunch -- partly because I own it, but mainly because I love the management's ability to build its fleet of ships while keeping debt levels to a minimum. Genco's debt-to-equity ratio is below 0.5, while its typical competitors have a ratio well above 1.
As CAPS player bNcS puts it:
This industry is very segmented, and there is a lot of room for consolidation once the cycle turns and the small players are forced out. By keeping a solid balance sheet, [Genco] will be able to buy more ships and expand at great prices.
Natural-born Canadian
At this year's Value Investing Congress, Bruce Berkowitz, the well-respected manager of the Fairholme fund, formally recommended Canadian Natural Resources. He argued that the Alberta-based oil and natural-gas producer will be able to significantly grow its free cash flow over the next decade without having to purchase additional assets.
I don't think betting against Bruce Berkowitz is a particularly smart thing to do, and OConnorCapital, another member of our CAPS community, also agrees:
This stock is so cheap it borders on the absurd. CNQ's top-notch management (with a long paper trail of success) and outstanding underlying long-term fundamentals represent a compelling 3-5 yr. investment opportunity.
EOG-nog for the holidays
Finally, EOG is another oil and natural-gas producer -- this one based in good old Houston. Lately, EOG has been discovering and expanding into several new shale fields in Texas -- what is rapidly becoming a very productive source of energy.
According to CAPS member TXwildcatter, these initiatives should be promising:
EOG is an aggressive E&P company, who continues to provide upside growth in existing plays and future areas. Have relatively no debt, and aggressively developing Barnett shale position, and international plays.
The Foolish bottom line
It would be a tad silly to invest in any of these stocks based only on the opinions and information we've shared here. What we say here isn't meant to be taken as a formal recommendation; we want only to generate some possible ideas that you might find worth further research. If you'd like to read more about what our CAPS community thinks, click here to get in the game.
So, until next week, Fools, keep panning for that undervalued gold . just make sure it isn't the small-f foolish kind!
Fool contributor Brian Pacampara owns shares of Genco Shipping and Trading but holds no position in any of the other companies mentioned. The Fool's disclosure policy always gets a five-star rating.
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