Top-Rated Value Stocks

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Are you familiar with the dynamic duo of Fama and French? No, they didn't sing "Private Eyes" -- that was Hall and Oates. And no, they didn't star in Tommy Boy -- that was Farley and Spade.

While the names Eugene Fama and Kenneth French may not come up in most dinner conversations, the two have done some of the most interesting academic research on stocks that I've read. In short, they've proposed that there's more to stock returns than volatility -- which was most academics' previous consensus. In research they conducted over various periods and across multiple geographic locations, Fama and French determined that stocks characterized as "value stocks" have consistently outperformed non-value stocks.

Today, I've rounded up five value stocks that are at the bottom of the bunch when it comes to price-to-free cash flow. To focus on high-quality stocks, I've cross-referenced these against ratings in our CAPS community of more than 83,000 investors.

Company	Free Cash Flow Multiple	30-Day Return	CAPS Rating (out of 5)
Perini Corp (NYSE: PCR)	3.5	(0.6%)	****
Hartford Financial Services Group (NYSE: HIG)	3.8	(11.1%)	****
Biovail (NYSE: BVF)	4.9	8.3%	****
Allstate (NYSE: ALL)	5.2	(9.1%)	****
Terra Industries (NYSE: TRA)	5.3	(10.0%)	****

Data from CAPS, Yahoo! Finance, and Capital IQ (a division of Standard & Poor's) as of Feb. 8. Free cash flow = trailing operating cash flow less capital expenditures.

Though the CAPS community obviously likes these stocks, I would advise against investing in any of them on the basis of this one metric alone. With that I mind, I thought I'd dig a little further into the story at Biovail.

The importance of research
Cheap stocks aren't always as cheap as they appear. Allow me to explain: Nearly every stock that's gotten cheap enough to show up here has its share of blemishes that caused investors to let it get so cheap. Our job as investors is to make sure we understand why a stock has ended up so cheap, and to determine whether the risks have been overblown -- because if they have, then we could have a screaming value on our hands.

At Biovail, we can even put a proper name to the risk: Wellbutrin.

Biovail's business is developing drug delivery technologies, specifically for drugs that work on problems in the central nervous system. Of course, when we say "delivery" here, we're referring to the release of the drug in a patient's body, not the physical delivery of pills. Biovail focuses mainly on developing the delivery technology, then typically partners with larger pharmaceutical companies, such as GlaxoSmithKline (NYSE: GSK) or Forest Laboratories (NYSE: FRX), for marketing and distribution.

Wellbutrin XL was developed by Biovail as an extended-release version of the successful antidepressant that goes by the same name (sans the "XL"). The drug has been a big hit for Biovail, but has had the unfortunate side effect of making the company very dependent on that single drug's revenue stream. Now the company is starting to see competition from generics, and is watching its Wellbutrin revenue wither. Fellow Fool Brian Orelli doesn't even think Biovail's next formulation of Wellbutrin will be able to move the needle much.

Now we need to balance this information against the fact that the company is trading at less than five times its trailing cash flow and less than 10 times its expected 2008 earnings per share, and is doling out a dividend yield of 10.9%. On CAPS, the consensus seems to be that the low price is worth the risk. Of 367 total investors who have chimed in on the stock, 351 think that it will outperform the broader market.

One of these Fools, RxBodie, got bullish on the stock when it fell under $13.50:

[Biovail was] beaten down too far too fast. Generic business doing well. Branded products are losing patent protection but I feel it is already baked into the price. Dividend is very high for the time being.

So what do you think? Are these stocks values, or value traps? Log on to CAPS and let the rest of the 83,000-member community know what you think.

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