5 Frugal 5-Star Stocks

I'll admit it: I'm a bit of a penny-pincher. I'm notorious for flea-market-hopping, building computers with refurbished parts only, and waiting in two-hour lines for blockbuster door-crasher sales.

Nothing irks me more than paying up for something that, if given enough time, I could probably purchase at a significantly discounted price -- especially when it comes to my investments.

Our penny-pinching process
So, with the help of our community over at Motley Fool CAPS, I'll once again try to find some cheap stocks for all of my kindred stingy spirits. The approach is far from complicated: I'll run a simple screen for five-star stocks (the highest 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.

Meet the Frugals
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, here's this week's list of 5-Star Frugals:

As always, our family of Frugals is dominated by some pretty pedestrian businesses. But that should be just fine with us. As value investors know well, boring stories often translate into the market's biggest returns.

Here's a quick summary of one particularly dull (but interesting) Frugal, as well as what some of our CAPS players think about it. The bullish arguments might just be enough to get your big wheels spinning.

Delivering cheap goods?
Nothing spells boring quite like the trucking business, and Celadon Group -- one of North America's largest transporters of auto parts, lawn tractors, and various consumer goods -- is no exception. After double-bagger returns in 2005, Celadon shares have remained rather uninspired over the last year, currently trading at a 20% discount from August highs. But the Indianapolis-based company isn't the only trucker that's been failing to deliver the good returns.

The freight industry, as a whole, has been experiencing declining demand of late while many uncertainties continue to surround future input costs. New regulations regarding fuel content and engine technologies have Mr. Market pretty spooked on trucking (the volatility for the trucking industry is well above the market average). So, given all of these trucking-related concerns -- not to mention worries over a softening economy -- Celadon's seemingly attractive valuation might, in fact, be a proper risk-adjusted price.

However, many of our value-oriented players in CAPS simply scoff at the market's valuation of Celadon.

Keep on truckin'
Despite posting lower-than-expected revenue during the last quarter, Celadon still managed to grow its earnings 39% year over year while operating margins improved significantly. Mr. Market sent the shares reeling after the results were announced, but a few analysts -- along with our CAPS community -- view the margin expansion as a very positive signal. In other words, many are impressed with the way the company is managing to drive through the nasty trucking environment.

Among the several keys that founder and CEO Stephen Russell has implemented to weather the transportation storm are highly diversified client base (including John Deere, Wal-Mart, and Alcoa), the removal of the Big 3 automakers from their client list, and continued recruitment of "first class" drivers (with low turnover). In addition, Russell's recent purchase of assets from Digby Truck Lines -- which broadened their customer base even further -- also helped Celadon cope with the weakening demand.

So, even against tough headwinds, Celadon Group has managed to stay on the road. At these fairly Frugal levels, Celadon looks like an interesting risk/reward proposition. But don't just take my word for it. Here are three CAPS participants who think the shares will soon be on the road again:

• tgillespie: "The organizational and technological infrastructure of this company makes it efficient and profitable. It is doubtful that the railroads in this country will any time soon be able to take a significant amount of freight business away from the trucking industry."
• vcbthornton: "Founder still involved and invested, tends to exceed earnings expectations ... Small enough to fly under the radar most of the time, but quality will eventually be recognized"
• Youngandold: "Low valuation, good business management system, thoughtful strategy. They will likely outperform other TL (truckload) companies. No signs that volume growth will abate in the sector."

A Fool's final word
As always, 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 search for Frugals of your own, read what our CAPS community thinks, or even chime in with your own opinions. Click here to get in the game.

That's all for this week, Fools. Be sure to join me next week when I'll highlight another batch of cheap stocks for your perusal. Until then, Frugal on!

For more cheap-ish CAPS content:

• The Contrarian Shopping List
• 5 More Turnaround Stocks
• Get Ready for the Bounce

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Wal-Mart is a Motley Fool Inside Value choice. The Fool's disclosure policy always delivers the goods.