5-Star Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the local flea market, or 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 bargain bin:  

As usual, our list 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.

The fast and the luxurious
Fancy cars are the last thing you'd expect to find in a bargain bin, but let's just say we got lucky this week. Italian-based Fiat, maker of the luxurious Ferrari and Maserati, has undergone a major restructuring over the last few years, but looks to be turning the corner at market-beating speeds. At least, that's what our CAPS community thinks.

Dream cars are surely the face of Fiat, but it might surprise some Fools to know that the company is a huge conglomerate with a presence in more than 190 countries. In addition to making luxury cars, Fiat manufactures agricultural equipment, commercial trucks, and even production systems like exhausts and suspensions. The company also has small stakes in the publishing and communications businesses.

Fiat's mishmash is largely the result of decades of empire construction (and value destruction) brought on by the Agnellis, Fiat's founding family. However, since turnaround expert Sergio Marchionne took the reins a couple of years ago, Fiat has witnessed a dramatic reduction in costs, market share growth in each of its divisions, and real free cash flow generation. More importantly for investors, the stock has returned approximately 250% in just two short years.        

Where does that leave us Fools today? Well, now that the turnaround is complete, Marchionne has a four-year plan in place geared toward prolonged growth (in addition to further margin expansion). With the company recently announcing a share buyback of $1.87 billion, I'd say this growth is pretty affordable -- and given Marchionne's track record, very reliable, too.  

But don't take my word for it. Take these CAPS pitches out for an exhilarating test-drive and see for yourself:

• NtscrbTransportn likes Fiat's global opportunities in automotive and says, "[The] company's projected increase in production of Ferrari and Fiat 500 cars amidst strong demand in new markets like China, the Arab Emirates, Mexico and Brazil ... will aid [it] to deliver a solid 2007, making Fiat a solid investment."
• CAPS All-Star sciencebzzt, meanwhile, considers Fiat's entire portfolio: "Most of their money is made in regular autos (like all the little cars and trucks you see zipping around Europe and South America) and big industry (construction, agricultural, commercial trucking). They're involved in machine and software production on some level too. Fiat is a great company, and they're going to keep growing ..."

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

Think you can pitch your favorite stock -- or ditch your least favorite one -- in 27 seconds or less? That's just what we're doing over at Motley Fool CAPS! Check out our new 27-second stock videos.

Unconvinced about the power of cheap stocks? Fool contributor Brian Pacampara has been tracking the stocks mentioned in this column. Currently, the portfolio is ranked 326 out of 25,720 in CAPS. You can check it out here. Brian owns no position in any of the companies mentioned. The Fool has a disclosure policy.