Top-Rated Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the local flea market, or at 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 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
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 four or five-star stocks (out of 5) with enterprise value-to-EBITDA (EV/EBITDA) ratios below 10.

Dive in 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 this week's bargain bin:

Data provided by Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

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.

For starters, Waste Management, WD-40, and IBM look like three stocks worth considering.

Dumpster diving
Bad weather conditions, high fuel costs, and a slowdown in waste volumes have all helped lower Waste Management's year-over-year earnings so far in 2010. The shares have lagged trash haulers Waste Connections and Republic Services (NYSE: RSG) year-to-date, but recently improving collection volumes should serve as a much-needed tailwind for the rest of the year. With the company continuing to invest heavily in its waste-to-energy business, Waste Management looks like a relatively low-risk way to get some growth.

Early this year, CAPS All-Star PsychoDr urged Fools not to waste the opportunity:

I love waste management. Not just because they pick up my trash every week, and not just because they only charge me every other month ($40.00 a pop), but because they also charge every neighbor in my neighborhood the same $40.00 a month. ... Now the really big thing for me is the methane they are using to produce electricity. ... How can you not love a company that gets people to pay them to pick up things that they then use to create other things that they sell to other people.

Squeaky situation
WD-40's fundamentals have been steadily improving over the past few months, making the stock's recent weakness all the more attractive. In the company's second quarter, sales spiked 30% on strong results from its multi-purpose maintenance product division, while gross margins also improved on stable oil prices and key product development initiatives. With its balance sheet also firming up and the stock trading at an EV/EBITDA discount to competitors Church & Dwight (NYSE: CHD) and Clorox (NYSE: CLX), WD-40 seems like a relatively safe bet at these levels.

CAPS All-Star Clint35 explains why the stock is no one-hit wonder:

Not too long ago I gave this company a thumbs-down because they only sell one product. Since then I've done due diligence and I'm impressed. ... All their margins are good. About 49M in cash and 10.5M in long-term debt. 1.91 times free cash flow (on a yearly basis) to cover the div. which is yielding 3.06%. The P/E is 15.77 more than reasonable [in my humble opinion].

Big Blue skies ahead
Shares of consulting behemoth IBM haven't done a whole lot in 2010, but the company's recent purchases of cloud appliance integrator Cast Iron Systems and B2B provider Sterling Commerce, from AT&T (NYSE: T), show, once again, that management is far from stagnant. Couple this recent flurry of "cloud-seeding" with an improving economic backdrop, and IBM looks like a good bet to see higher revenue growth rates. Of course, at a forward P/E of 10.3 and a dividend yield of 2%, it's also a very inexpensive bet.

Early this year, CAPS All-Star ebitebit summed up the bull case:

As the services sectors rebound in the US and other western economies, IT spending will grow significantly. M&A activity will also boost IT spending. Financial regulation, splitting / ring fencing investment banking operations will also result in more demand for IT resources. IBM is well positioned to benefit and currently at an attractive valuation.

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 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.