Top-Rated Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the flea market, or the 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 Warren Buffett says, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

Our penny-pinching process
With the help of our community over at Motley Fool CAPS, I'll once again try to find cheap stocks for all of my kindred stingy spirits.

The approach is far from complicated: We'll run a simple screen for four- or five-star stocks (five stars is the max) with enterprise value-to-EBITDA (EV/EBITDA) ratios below 10.

Dive into the bargain bin
By running this screen, we'll zero in on statistical bargains that, according to our CAPS community, have plenty of great reasons to trade at much higher levels.

Let's dive right in:

Company

EV / EBITDA (TTM)

Industry

CAPS Rating
(out of 5)

Huntsman (NYSE: HUN  )

9.9

Diversified chemicals

*****

Corning (NYSE: GLW  )

7.3

Electronic components

*****

EZCORP (Nasdaq: EZPW  )

6.5

Consumer finance

*****

BHP Billiton

9.3

Diversified metals and mining

****

Mirant

2.1

Independent power producers and traders

****

Data provided by Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.
TTM = trailing 12 months.

As usual, our list isn't exactly brimming with the most exhilarating businesses. But that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's best risk-adjusted returns.

Huntsman, Corning, and EZCORP look like three stocks worth considering.

Hunts for value
Since the termination of a planned merger with Hexion Specialty Chemicals in late 2008, shares of chemicals company Huntsman are up big. But a combination of plant outages, higher raw costs, and general market malaise has sent the stock spiraling over the past three months. With a strengthened balance sheet after its settlements with Apollo, as well as foreign banks Credit Suisse and Deutsche Bank, the recent weakness could be providing a nice window to jump back in.

CAPS member alandefeld explained the special opportunity:

Huntsman started out as a special situation based on the failed Hexion acquisition and subsequent lawsuits against erstwhile financial backers. These events, along with the high price of oil pre-recession, severely depressed Mr. Market's view of the company's value. ... I believe that it is still undervalued, especially given that it appears to be a well-run company which is responding carefully to a recession-torn global chemicals industry. 

Gorilla in the room
Corning's shares were also on a slippery slide over the past few months, until a recent upgrade from Bernstein Research finally broke the downtrend. Since the bullish report last Monday, which centers on Corning's touchscreen "Gorilla Glass" potential, the stock is up about 13%. When you consider that LCD glass demand is expected to remain strong in 2010, the stock's paltry price-to-earnings ratio of around 10 says it's not too late to get in on the cheap.

Last month, CAPS member bunnhill summed up the bull case:

Corning has several things going for it. The LCD market should continue strong for at least a year based on several things. One, flat screen market will remain strong as people replace old sets. Two, with the downturn in the economy, people are staying home more and thus will be purchasing TV's for their entertainment. Three, I see a large market for Gorilla Glass.

EZ does it
With all the uncertainty surrounding the payday lending business, shares of EZCORP offer this week's most interesting risk/reward proposition. A bill to create the Consumer Financial Protection Bureau, along with newly introduced amendments to impose limits on the industry, have called into question the viability of short-term cash advancers like EZCORP and two main competitors, Advance America (NYSE: AEA  ) and Cash America (NYSE: CSH  ) .

Of course, for enterprising Fools willing to handicap whether the more threatening proposals, such as a per-customer loan limit, have a real shot of passing, EZCORP might be a solid bet at today's levels.

CAPS member tombo615 helps Fools focus on the fundamentals in this post from last October:

Their financial statements show signs of consistent, long-term growth and profitability. Over the past five years they have substantially grown, increased their retained earnings, and paid off debt. Their strong ratios make [EZCORP] a solid choice in the uncertain world of small caps, and their relatively low-beta help to decrease the volatility that most small caps suffer from.

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 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.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy always pays the full price for transparency.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1207882, ~/Articles/ArticleHandler.aspx, 7/23/2014 6:57:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement