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.

Rand-ical changes
Thanks to the ravages of competition, businesses often transform -- for better or for worse -- into entities that are almost unrecognizable from their previous selves. Just take a look at how IBM (NYSE:IBM) and Apple (NASDAQ:AAPL) have evolved over the years. Well, fortunately for its investors, Ingersoll-Rand looks like another company that is making a drastic change for the better. With 221 CAPS players calling outperform on the stock, even Optimus Prime would be envious of Ingersoll's transformation.  

Ingersoll first caught my eye last February, when a number of respected investors -- including Warren Buffett's Berkshire Hathaway, David Dreman, and John Keeley -- all disclosed new stakes in the company. Blindly riding the coattails of master investors is just plain dangerous, but when that many esteemed gurus are piling into the same investment (at around the same time), you almost have to take a closer look.

In Ingersoll, you have a conglomerate with some well-recognized brands under its belt, like Thermo King (mobile refrigeration), Club Car (golf carts), and Schlage (security). However, more than the brands themselves, sharp investors are attracted to Ingersoll for the steps it's taking to enhance the value of those names.

Since 2000, Ingersoll has shed several of its segments -- in the energy equipment, pump, and bearings space -- to transform itself from a volatile cyclical company into one that's much more stable. Today, Ingersoll operates a nicely diversified set of businesses: climate-control, industrial, and security. By focusing on core competencies and having a less capital-intensive model, management has been looking to increase returns on invested capital in the 15% range, while, at the same time, being better prepared to survive harsh cyclical storms. How can any value investor not like that?

Mr. Market has looked favorably on Ingersoll's changes, returning a compounded 22% (dividends not even included) over the past five years. Most recently, Ingersoll's shares surged 7.5% in one day after receiving a whopping $4.9 billion for its Bobcat construction vehicle division and two other segments. It's tough to say for certain whether those returns will continue, but one thing's for sure: This transformer is at least worth playing with on CAPS.

Now, let's hear from the folks at home ...
CAPS player Beijing Bill made this sweet call all the way back in December (or 21% ago), but his arguments continue to hold water.

IR is a decent little company, posting annual earnings gains of 11% over the last few years. Wall Street has bid its stock way down, expecting it to get clobbered in the housing bust, but 1) its business lines are diversified out of American housing into other sectors and other countries, and 2) commercial construction might pick up some of the slack from the residential housing bust. In any case, an established company with decent financials.

Finally, TheGrtGdOM leaves us a sad fact to consider.

The tragic (Minnesota) bridge collapse will provoke some major and overdue infrastructure repairs in America. Doing those repairs all over will require the services of IR. Hopefully, those repairs will indeed make future tragedies less likely. Picking it in this current correction cycle.

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.

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

Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 1,568 out of more than 60,000 portfolios. Brian owns no position in any of the stocks mentioned. Spectra Energy is a Motley Fool Income Investor recommendation. Berkshire Hathaway is a Stock Advisor and Inside Value selection. The Fool's disclosure policy always pays the full price for transparency.