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's 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.

Etch-a-Skech
Though easier said than done, buying into an apparel stock right before -- and even during -- the height of its popularity can be outrageously profitable. Just ask Crocs shareholders how their stock is doing. But unlike Crocs -- which has been given a lowly one-star rating in CAPS -- there's a fashionable footwear stock out there that our community actually likes right now. With 50 All-Star bulls in its corner and just one bear, Skechers USA seems to be the stylish choice for our players' portfolios.    

Why do CAPS Fools feel so good in Skechers' stock? Well, because they feel good in Skechers' shoes. According to our CAPS community, Skechers -- which targets the casuals, dress casuals, comfort, and active segments -- has some of the coziest footwear on the market. Even better, many players say you can wear Skechers without having to compromise style.    

As my Foolish colleague Ryan Fuhrmann has pointed out, Skechers' diversified strategy of selling more than 2,000 styles of shoes is paying off pretty well. By reaching men and women across virtually every age and demographic, Skechers has been able to grow its top line at a compounded rate of 14.5% over the past three years, while delivering double-digit returns on capital and equity. In the latest quarter, sales and net income increased 24% and 44%, respectively.     

Now, despite Skechers' recent operating performance and bargain-bin price, I wouldn't consider a footwear stock. For me, they're based way too much on consumers' fickle tastes to bet any real money on. Of course, following that logic wouldn't have made you rich with Crocs and Deckers (see the chart), so maybe I should just keep quiet on this one. After all, Chairman and CEO Robert Greenberg, who owns 22% of Skechers, isn't exactly buying my argument, either.

Here are a couple of All-Star players who think Skechers is a comfortable fit for any portfolio -- in CAPS, at least.

FrozenCanuck says there's nothing sketchy about the future of Skechers:

My wife bought the shoes two years ago because of their style and nobody that we know had heard of them. Now I see ads everywhere, and they are starting to take off. The financials look very clean, the valuation is impressively cheap, and I think they will last for a few years. Outperform!

Persuter agrees:

They make all different kinds of shoes -- casual skateboard-style, formal black leather, trendy brown suede, women's shoes, children's shoes, etc. I like the diversification and I flat-out like the shoes. Let me put it this way -- I've seen one or two people wearing Crocs, but I see people wearing Skechers all the time.

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. Get in the game.

Oh, and it's totally free -- an offer that even the deepest of value investors should never pass up.

Unconvinced about the power of cheap picks? Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 43 out of more than 60,000 portfolios. Brian owns no position in any of the stocks mentioned. The Fool's disclosure policy always pays the full price for transparency.