5-Star Stocks in the Bargain Bin

Editor's note: In a previous version of this article, we incorrectly overstated the insider ownership of Calumet. We apologize for the error.

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 stingy kindred 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 of less than 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'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.

Today's specialty
My favorite source of real money ideas are the portfolios of investors who are, quite simply, a lot better than I am. James Early, lead advisor over at Motley Fool Income Investor, is one of them. When he formally recommended Calumet Specialty Products to subscribers last month, I was intrigued. But when fellow Fool David Meier brought it to our attention that yet another savvy investor -- Bruce Berkowitz of Fairholme Capital Management -- also held Calumet (though his fund has been trimming the position recently), I thought I'd elaborate.  

Calumet's business model is pretty simple: The company refines oil into the materials used in a bunch of everyday products. Now, from reading that last sentence, it's tough to tell exactly what's so special about Specialty. After all, major multinationals like ExxonMobil (NYSE: XOM), Sunoco (NYSE: SUN), and ConocoPhillips also compete in the oil refinery space. However, it's Calumet's wide range of more than 250 specialty products that gives it an edge in competing for new business.

According to the company, it's the only refinery that produces all four of the following: naphthenic lubricating oils, paraffinic lubricating oils, waxes, and solvents. As a result, Calumet's applications range all the way from industrial goods such as batteries and hoses, to consumer goods like candles and chewing gum, to automotive goods such as motor oils and tires. Calumet has added roughly 65 new customers in each of the last 10 years. It currently has more than 800 customers, and not a single one represents more than 10% of its specialty business. Now that's what I call a diversified client base.  

Of course, all the customers in the world don't mean a thing if they don't help deliver the financial goods. Fortunately, Calumet has improved returns on capital every year since going public (currently at 26.4% ttm), and has even increased its quarterly distribution more than 85% in the past year. Currently, the dividend yield stands at a tantalizing 5.40%.

With all that said, Calumet's biggest selling point (for me, anyway) lies with its master limited partnership structure (MLP). I'll let James explain the details of an MLP (not to mention Calumet's other investment qualities), but, for now, know that Calumet utilizes this MLP structure to aptly benefit shareholders.

Taken all together, Calumet Specialty is worthy of at least a gander on CAPS.  

And now ...
... let's hear from All-Star bargain-hunters in our own backyard.

• ayerskw keeps it simple: "Long established, well managed, strong cash flow & high internal ownership translates to a great long term, high dividend equity holding."

• MrMighty, meanwhile, thinks Calumet would've been favored by yet another awesome investor: "If you go to the website, it looks like the sort of thing Peter Lynch would love, extolling the qualities of their petrolatum, giving details of their wax offerings, etc. This gets a strong look from me for new money."

• Finally, CAPS All-Star TDRH leaves us with a pair of bargain-bin stats: "5.4% dividend yield, P/E 9.03 -- cyclical, but demand for their products does not appear to be dropping. What is not to like?"

A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation; we only want 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.

Love value investing? Give Motley Fool Inside Value a try. You can get 30 days of access to the service with no charge and no obligation. 

Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 3,503 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.