America's Next Top Value Stock

Though value investors have been some of the most successful investors out there, finding good stocks at bargain prices is far from easy. Though markets aren't as efficient as some university professors may want to tell you, they generally do a pretty good job pricing stocks. So while there are good deals out there, you're going to have to break a bit of a mental sweat if you want to make sure that you're investing in the stock equivalent of Brad Pitt, not Kato Kaelin.

Fortunately for us, in the search for stock market values, we have the 170,000-plus members of The Motley Fool's CAPS community voting on which stocks are true stars and which are just posers. To gather some ideas, I've dug up a handful of companies valued at less than twice their book value -- a measure often used by value investors.

Company

Book Value Multiple

52-Week Stock Performance

CAPS Rating

PMI Group (NYSE: PMI  ) 0.8 68% **
Nordic American Tanker (NYSE: NAT  ) 1.2 (19%) ****
Spirit AeroSystems (NYSE: SPR  ) 1.6 6% *****
Frontier Communications (NYSE: FTR  ) 1.7 15% ***
USG (NYSE: USG  ) 1.9 (5%) ***

Source: Yahoo! Finance and CAPS as of Nov. 29.

As you can see, though these stocks all carry value-like multiples, the CAPS community obviously doesn't think that all are worthy of your investment dollars.

No twinkle in these stars
In a country that has treated homeownership as a rite of passage, the destruction wrought on the housing market over the past few years has been breathtaking. Certainly this has been bad for homebuilders and banks, but mortgage insurers who end up on the hook when an insured homeowner defaults on their loan have also been clobbered.

PMI Group hasn't been alone in its misery: Other insurers such as MGIC Investment and Genworth Financial (NYSE: GNW  ) have been hit as well -- but I'm not sure that the old "misery loves company" line works on the stock market. The mortgage mess isn't over with yet, and the two-star rating that some CAPS members have given PMI Group shows that they think it will continue to be hobbled by the turmoil.

USG and Frontier Communications are both rated at one more star than PMI Group, but the three-star ratings mean that CAPS members are still on the fence on both of these. To USG, PMI Group's woes are familiar because the wallboard manufacturer's profits have vanished as the housing market has struggled. Frontier, meanwhile, is in the none-too-exciting wireline telephone business and faces some pretty bleak growth prospects. On the bright side for investors, though, the company produces a heck of a lot of cash flow, which it pumps back out to shareholders through fat dividends.

A five-star stock is born
Now that we've left the riffraff behind, we can move on to a stock that CAPS members think is worthwhile: Nordic American Tanker.

Frankly, I'm not much of a fan of Nordic American Tanker. Under the company's financial model, it pays shareholders a dividend that's roughly equal to operating cash flow and then funds capital spending by issuing new shares. This creates a merry-go-round of capital that, I believe, doesn't serve investors particularly well.

That said, the historical returns from the stock -- on a total return basis that includes dividends -- are impressive. My take is that this is in spite of the odd financial model, but whatever the case, shareholders have fared well to date. And some members of the CAPS community think more of the same may be ahead. In particular, members seem to be drawn by the company's extremely low debt level and, of course, the big dividend.

But while Nordic American Tanker's four-star rating makes it a CAPS favorite, it couldn't quite top this week's top value stock -- Spirit AeroSystems.

This Motley Fool Hidden Gems portfolio candidate gives investors plenty of reasons to get interested. There's the low book-value multiple, but the company also boasts a praise-worthy 13% return on equity and an 8% return on its total capital. The company is also an industry leader: It's the largest independent aircraft parts designer and the largest supplier of aerostructures (fuselages, propulsion systems, etc.) to Boeing (NYSE: BA  ) and one of the largest suppliers for Airbus.

As is often the case in a low-valued stock, there is a bit of a fly in Spirit AeroSystems' ointment right now. The company is the largest supplier for Boeing's troubled 787 Dreamliner, and that makes that project a big key to the future. In advance of that and some other projects hitting high gear, Spirit AeroSystems is investing heavily in both inventory and capital spending, which means that it's burning through cash like it's nobody's business.

But CAPS members have been sticking by the stock. Just recently, jormar1990 supported it on the expectation that some good news out of Boeing on the 787 will light a fire under the stock. Jormar1990 said:

Global leader in new and increasingly common composite aerospace structures. Big clients include both Boeing and Airbus. When Boeing finally starts 787 production, this stock will go up

Make your vote count!
Do you agree that Spirit AeroSystems could be America's next top value stock? Click over to CAPS and let the rest of the community know what you think. And while you're there, you can log your vote for the other stocks that you think should be in the running.

Spirit AeroSystems' lack of cash flow means it doesn't pay dividends, but is that really a big deal? Dividends are probably a fad anyway.

USG is a Motley Fool Inside Value selection. Spirit AeroSystems is also a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy -- which does nothing but monitor disclosures -- knows that boring can be beautiful.


Read/Post Comments (2) | Recommend This Article (6)

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  • Report this Comment On December 01, 2010, at 12:05 PM, dmp1718 wrote:

    USG is a real Gem here. Once a 200/share stock it took a great hit during a lawsuit that drove it down to around 5. Since the suit was settled it has traded regularly around 10-15. What has quitely happened though is during this time they bought up nearly all the competitors and are poised to raise prices and garner most of the market. This is just starting to happened. They recently announced a 25% price increase which should greatly drive the bottom line. This stock is poised to skyrocket in my opinion.

  • Report this Comment On December 02, 2010, at 12:32 AM, TMFKopp wrote:

    @dmp1718

    "What has quitely happened though is during this time they bought up nearly all the competitors"

    Oooh, I'd be careful with that... USG has a strong position in the industry, but it's a little misleading to say it "bought up nearly all the competitors."

    Maybe you know something different, but as far as I know, the company has roughly a 25% market share and has a bunch of major competitors including National Gypsum, PABCO, Temple-Inland, Georgia-Pacific, CertainTeed, Lafarge, and American Gypsum.

    Sheetrock is a very strong brand in the gyp market, but the 25% bump is a bold move in this environment. I'd worry that the company will see an impact on volume if the whole group doesn't follow suit (as far as I've seen CertainTeed, Lafarge, and National Gyp have done a similar bump).

    Matt

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