5-Star Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the local flea market, or the neighborhood car dealership, people inherently understand the benefits of getting a great deal.

Yet, despite this infatuation with bargain opportunities, it doesn't occur to many investors that buying cheap stocks is possibly the best way to squeeze a whole lot of bang out of a hard-earned buck. As legendary investor Christopher H. Browne writes in The Little Book of Value Investing, we should always attempt to "buy stocks like steaks ... on sale."

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: We'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 lower than 10. We'll use EV/EBITDA rather than the more common price-to-earnings ratio, so that we can account for differences in each company's capital structure.

Dive in the bargain bin
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 is this week's bargain bin:

As usual, our list isn't exactly brimming with exciting, or even well-recognized, names. But that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's biggest returns.

Value in VALU?
If you've been investing long enough, there's a good chance that you've found yourself scouring one of Value Line's 500-pound investment surveys for sweet stocks. I know I have. And I still do. So, when the New York-based publishing and investment management firm recently regained its five-star CAPS status, all while it was hitting new 52-week lows, I just had to take a closer look. Judging from the sentiment of our CAPS community, not only is Value Line timely, but it's cheap, technically attractive, and safe.

Last September, my Foolish colleague Ryan Fuhrmann laid out Value Line's Foolish investment traits, such as the capital-light nature of its business model, impressive free cash flow generation, little analyst coverage, and, most importantly, the company's solid reputation in the world of finance. Prior to the write-up, though, Value Line's stock had surged to such heights that it spooked Ryan off the stock. Well, Value Line has dropped significantly since then, and can now be purchased at 16 times earnings with a 2.60% dividend yield to boot. Sweet call, huh?  

Stingier investors would probably need the price down even further before jumping in, but in my experience, it's pretty rare that a no-debt, highly profitable, and highly respected 75-year-old company stays down for too long. Sure, top-line growth has been virtually nonexistent for the past several years, but Value Line's increasing returns on capital -- coupled with the recurring nature of its cash flows -- should do well to earn investors at least a decenttotal return at the current prices.

But, hey, what do I know? After all, I'm still that dude at the public library who hogs the big green binder because he can't afford his own subscription. Fortunately, here are three CAPS All-Stars you can look to for a second, third, and fourth opinion:

• sandvig touches on some of Value Line's key ratios, as well as the appropriate trading strategy to use with the stock: "They publish a very high quality product. They have a very loyal customer base. Their P/E ratio is modest, their return on equity is outstanding (about 42%), and they have no debt. I don't see much downside. I consider this a classic 'buy and hold.'"
• dhadcock, meanwhile, gives us a possible tailwind to look forward to: "Debt is zero, ROE about 40%. The ticker is VALU, come on! Ownership is like 80% inside and I think the age of individual investing has just begun. This service is so often spoken of very highly."
• Finally, blutzed44 gives us a more balanced opinion on the shares: "I think the biggest positives are, 1) great service 2) Unbelievably high insider ownership 3) Super Strong Balance Sheet 4) Solid Dividend. Negatives: Earnings have not really increased in a substantial fashion over the last five years."

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 ideas that you might find worth further research. If you'd like to scour the bargain bin for yourself, read what our CAPS community thinks, or even chime in with your own opinions, click here to get in the game.

Oh, and it's totally free -- an offer that even the deepest of value investors should never pass up.

For more cheap Foolery:

• 7 Surprising 1-Star Stocks
• 5 More Turnaround Stocks
• 7 Highly Rated Stocks on Sale

Unconvinced about the power of cheap stocks? Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 123 out of 30,039 portfolios. You can check them out here. Brian owns no position in any of the stocks mentioned. Posco is a Motley Fool Income Investor choice. The Fool's disclosure policy always pays the full price for transparency.