5-Star 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 legendary investor Christopher H. Browne writes in The Little Book of Value Investing, we should always attempt to "buy stocks like steaks ... on sale."

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 five-star stocks (the highest rating a stock can get in CAPS) that have enterprise value-to-EBITDA (EV/EBITDA) multiples below 10. We'll use EV/EBITDA rather than the more common price-to-earnings ratio, so that we can account for differences in each company's capital structure.

Dive in the bargain bin
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 cheap stocks:

As usual, our bargain bin isn't exactly brimming with exciting, or even well-recognized names, but that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's biggest returns.

Snack foods for thought
Our CAPS community never fails to impress me. Recently, a five-star rating was awarded to J&J Snack Foods -- yet another company that has posted decades long of solid performance, but which I'd never heard of previously.

Now, don't get me wrong. I've devoured many a SLUSH PUPPY, ICEE, TIO PEPE churro, and Mrs. GoodCookie over my lifetime. But little did I know that J&J -- the company behind those popular brands -- has managed 35 straight years of sales growth, 35 straight years of profitability, a decade of steadily increasing returns on equity, and is a six-time selection in Forbes "200 Best Small Companies." No matter how you unwrap it, those are some pretty tasty facts.

In 1971, President, CEO, and Chairman Gerald Shreiber founded the company when he purchased a bankrupt pretzel company in South Jersey. Sales were about $400,000 then. In 2006, J&J reported revenues of $514.8 million and net earnings of $29.5 million. So, it's safe to say that Shreiber -- who continues to own about 23% of the company -- has his interests aligned pretty closely with long-term shareholders.   

And, as fellow Fool Rick Munarriz highlights, J&J also pays out a sweet little dividend. At current levels, it represents a modest yield of 0.90%. Couple that with an impeccable history of organic growth (through the use of free cash flow), and J&J is anything but an expensive treat -- especially for a company with so many industry-leading brands.

But don't take my word for it. I'll let you snack on scrumptious opinions from two of our CAPS contestants:

•  CAPS All-Star pencils2 takes a thorough approach and crunches on the financials: "An interesting little company. Strong balance sheet, good margins, strong, improving cash flow, not dependent on the bank for expansion, and insiders own a good chunk of shares. The P/E is right around the industry average, overall I think this is a cheap price considering the financial strength and possibilities for the company over the long-term."

•  While Growthhead considers more qualitative issues: "... the company seems exceptionally well run, has high insider ownership and meaningful dips will likely result in nice entry opportunities in this relatively illiquid stock as marginal ROIC looks to be well-above recent years ROIC."

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. 

For more cheap Foolery:

• 7 Growth Stocks on Sale
• 7 Highly Rated Stocks on Sale
• Contrarian Shopping List

Unconvinced about the power of cheap stocks? Fool contributor Brian Pacampara has been tracking the stocks used in this column (and under its previous identity, 5-Frugals). Currently, the portfolio is ranked 413 out of 25,371. You can check it out here. He owns no position in any of the companies mentioned. The Fool has a disclosure policy.