5-Star Stocks Begging to Be Bought

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"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
-- Warren Buffett

Can't argue with that, can you? Despite the recent rally, there's no shortage of fear in plenty of industries. It's a real gut check, but that fear is creating opportunities for investors patient and diligent enough to search for great stocks left behind by the market meltdown.

Using our Motley Fool CAPS ranking system's screening tool, I scanned for bargain companies with the following characteristics:

• Five-star ratings -- the highest our CAPS community offers.
• Estimates of profitability in the year ahead.
• Terrible performance over the past 52 weeks. Yes, almost every stock meets this condition, but I'm looking for the bargain opportunities. Not stocks that have simply fallen in price, but stocks that are cheap.

Have a look:

Company	52-Week  Price Change	Recent Price	Forward P/E Ratio
Chesapeake Energy (NYSE: CHK)	(27%)	$28.59	11.94
EZCORP (Nasdaq: EZPW)	(21%)	$13.66	8.35
Johnson & Johnson (NYSE: JNJ)	(13%)	$60.93	12.53
PepsiCo (NYSE: PEP)	(18%)	$58.51	14.43
Sasol (NYSE: SSL)	(15%)	$38.79	9.60

Data from Motley Fool CAPS and Yahoo! Finance, as of Sept. 29, 2009.
P/E = price-to-earnings ratio.

None of these are necessarily recommendations -- just good starting points for you to dig a little deeper. You can rerun an update of this screen, if you like.

A closer look at EZCORP
Credit evaporated over the past year, but consumers' need for cash didn't. That's been hell for millions trying to make ends meet, but it's music to EZCORP's ears.

EZCORP, you see, is in the pawn business. It makes small, collateralized loans to people who demand cash on the spot, and are willing to subject themselves to ungodly interest rates -- about 240% annualized.

First, let's take a step back and look at EZCORP's business segments:

Segment	2008 Percentage of Total Revenue
Pawn service charges	30%
Gross profit from merchandise sales	20%
Gross profit from jewelry scrapping	9%
Signature loan fees	40%

Pawn service charges are fees charged to customers whose collateralized loans are outstanding. Now, I know what you're thinking: Making loans to people who desperately need cash sounds a lot like subprime lending, right? Not even close. As EZCORP's annual report states, "We do not record loan losses or charge-offs of pawn loans because the principal amount of an unpaid loan becomes the inventory carrying cost of the forfeited collateral."

If a customer chooses to walk away from the loan, the collateral is sold. Now here's what's important: Those loans are only granted in amounts between 25% and 65% of the collateral's resale value, so collecting repayment is a cinch. The margin of safety that provides is, in fact, the opposite of subprime lending.

Signature loans -- EZCORP's largest segment -- are essentially payday loans. This, of course, is risky lending. But risk is monstrously counteracted by the astronomical interest rates customers agree to. A lender can handle a high default rate when he's charging a few hundred percent in interest, you know. Indeed, in 2008, bad loan charges totaled $37.2 million, next to $128 million in signature loan fees. Those kinds of numbers start adding up on the bottom line real quick.

In a nutshell: The credit crunch has been a boon for EZCORP. Last year, a time when banks like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) held on for dear life, was EZCORP's most profitable year ever. That kind of "feeding off others' pain" business model gets our CAPS community excited about this company's prospects in light of the possibility of long-term consumer struggles.

As CAPS All-Star TheGarcipian wrote earlier this year:

Face it, this economy is in the toilet and people will be hard pressed to come up with needed cash. You can't sell most of your equity investments without incurring massive losses (unless you've invested in gold, baby!), and you really shouldn't be touching your 401k for any loans, no matter how "temporary" they may be. Unemployment is expected to climb to double-digits, possibly as high as 20% (jeez!), but the rent has got to be paid. More and more people will be selling their "un-necessities" via EBay and local pawn shops. This is where EZCorp will make quite a boon this coming year ... I think this business will prosper during the recession/depression, and certainly warrants a much closer look as a real-world pick.

You take it from here
Have your own take on EZCORP? More than 140,000 investors use CAPS to share ideas and swap opinions. Click here to check it out and speak your mind. It's 100% free to participate.

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