5 Frugal 5-Star Stocks

I'll admit it: I'm a bit of a penny-pincher. I'm notorious for flea market-hopping, building computers with refurbished parts only, and waiting in two-hour lines for blockbuster, door-crasher sales.

Nothing irks me more than paying up for something that, if given enough time, I could probably purchase at a significantly discounted price -- especially when it comes to my investments.

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

Meet the Frugals
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 list of Five-Star Frugals:

Company

EV/EBITDA
(TTM)

Caps
Bulls

Caps
Bears

Exponent (Nasdaq: EXPO  )

9.0

16

0

Consolidated Graphics (NYSE: CGX  )

7.9

11

1

CNA Surety (NYSE: SUR  )

7.7

10

0

Olympic Steel (Nasdaq: ZEUS  )

5.9

56

4

Great Lakes Dredge & Dock (Nasdaq: GLDD  )

4.8

13

0



As always, our family of Frugals is dominated by some pretty pedestrian businesses. This week's list is composed of a consulting firm, a commercial printer, a provider of surety services, a steel producer, and a demolition company, respectively. But that's all right.

As value investors know well, boring companies often lead to the market's biggest returns. Here's a quick summary of one particularly dull (but interesting) Frugal, as well as what some of our CAPS players think about it. Some of the bullish arguments might just have you doing some Olympic-caliber cartwheels.

An Olympus-sized steal?
Olympic Steel ended 2006 on an ugly note, as investors watched their stock plummet 50% over the latter half of the year. Mr. Market's haircut was primarily the result of a challenging domestic auto environment, year-over-year decreases in sales and profits, and negative outlook for the steel industry as a whole. Naturally, steel producers are highly levered to overall GDP growth, but Olympic Steel -- with a narrower product range than many of its competitors -- is subject to substantially greater levels of earnings volatility. So, given many investors' bearish view of the economy and especially of American automakers, Olympic's low valuation might be perfectly warranted.

However, many value-oriented players in CAPS believe that the Ohio-based steel service center represents a true bargain-basement opportunity. Although the company has a long history of dismal growth and sporadic cash-flow production, it is management's recent initiatives that have our community pumping Olympic's iron.

An Odyssey to remember
Chairman and CEO Michael Siegal, who owns about 15% of the company, has taken dramatic steps to become a more financially stable and consistently profitable steel-service center. Through what management calls the "flawless execution" program, Siegal has laid off more than a quarter of the workforce, has implemented new cost-cutting and information systems, and has been shedding unprofitable divisions. More important, however, is that Olympic is finally beginning to diversify through acquisitions -- something that management has been reluctant to do in the past.

For example, the company's recent acquisition of PS&W -- a North Carolina-based fabricator -- should help Olympic in gaining much-needed efficiencies, through the delivery of value-added services. Many of our CAPS players believe that future deals of this nature will, at last, give Olympic the geographic and product diversity needed to grow consistently. Of course, we'll just have to wait and see whether management's acquisition strategy works out. However, given today's frugal prices, I'd say Olympic Steel represents a fairly attractive risk/reward proposition.

Here are three CAPS participants who believe that the mighty Zeus is even cheap enough to be considered a takeover candidate:

  • PopsDaniecki: I love steel right now. ... Necessary, dirty business, basic, American, in an industry where EVERYONE is talking about the takeover rumors.
  • Junkyardhawg1985: Very low enterprise value-to-revenue ratio relative to other steelmakers. ... The stock is selling at [just above] net tangible assets. With all of the takeovers in the steel business, these financials make ZEUS a great target.
  • BradVB: Growing fast. P/E below 10, trading near book. What more could you want?

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 search for Frugals of your own, read what our CAPS community thinks, or even chime in with your own opinions. Get in the game.

That's all for this week, Fools. Be sure to join me next week, when I'll highlight another batch of cheap stocks for your perusal. Until then, Frugal on!

For more CAPS-related cheapness:

Fool contributor Brian Pacampara loves value meals even more than value stocks, and he holds no position in any of the companies mentioned. Find even more great value by checking out our Inside Value newsletter service free for 30 days. The Fool's disclosure policy always pays the full price for transparency.


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