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 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 into 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.

Cheap help wanted
With an EV/EBITDA multiple of 9.6, MPS Group, a small-cap staffing company, just manages to squeeze into this week's bargain bin. MPS Group has to compete against powerhouse firms such as Adecco and Robert Half International to survive, so more frugal Fools might not be impressed with this (barely) cheap stock. Still, support is steadily building for MPS in our CAPS community. Let's try to figure out why, shall we? 

A quick glance at the financials shows that MPS Group isn't exactly struggling to stay in business. Despite a corporate strategy that aims to gain geographic and product diversity through numerous acquisitions, MPS has an immaculate balance sheet with no long-term debt, and it consistently generates a healthy amount of free cash flow.

Over the past five years, MPS has used that cash to buy back an increasing amount of shares, and that trend should only continue. With a stock that has remained relatively flat over the past year, fairly reasonable price multiples, and about $45 million remaining on the current authorization, I'd have to bet on management to follow through with more repurchases. 

On the strategic front, MPS's IT division still accounts for the majority of revenue, but the company's foray into highly specialized areas such as permanent accounting and health-care staffing is doing well to increase gross margins. This strategy might not be enough to stave off larger firms over the long run, but ravenous competition hasn't stopped All-Star analysts Goldman Sachs and Matrix Research from planting outperform calls on MPS.  

In addition to Foolish CAPS players, two of Wall Street's best, and even a share-repurchasing management team, CAPS All-Star NestscribeServcs also has a craving for the stock:

• Regarding the extent of MPS's global reach, Netscribe says, "It has presence across 200 offices throughout the United States, Canada, United Kingdom, and Europe, delivering its services to government entities and businesses in the disciplines of technology, finance and accounting, law, engineering, and healthcare."
• Moving on to larger industry trends, Netscribe informs us that "The demand for IT professionals in the US continues to soar as companies continue to invest in infrastructure and is likely to grow by $17.4 billion in 2005 to $20.1 billion by 2007."
• And in conclusion: "With demand for professional services growing faster than IT services, this stock offers good opportunity for long-term investors."

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.

For more cheap Foolery:

• 7 Highly Rated Stocks on Sale
• 5 More Turnaround Stocks
• Contrarian Shopping List

Make seven picks on CAPS by April 24, and we'll send you a free copy of The Motley Fool Five-Star Report. Inside you'll discover how to use CAPS as a research tool, and you'll receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one that you can easily translate into profits for your real-world portfolio. Get started now!

Unconvinced about the power of cheap stocks? Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 146 out of 26,968 portfolios. You can check it out here. He owns no position in any of the companies mentioned. The Fool has a disclosure policy.