5 Top-Rated Value Stocks

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, contrary to 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 all trading at less than 1.5 times their tangible book value. To focus on high-quality stocks, I've cross-referenced these against ratings in our CAPS community of more than 85,000 investors.

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

Heaping dividends
It's no mistake that CapitalSource has ended up in the bargain bin. It's a finance company in an environment that has left much larger financial institutions weeping on the floor in the fetal position (don't worry, Citigroup (NYSE: C), I won't mention any names).

CapitalSource makes specialized loans to commercial borrowers and health-care facilities, pocketing the difference between what it pays to borrow and how much it collects lending the money back out. The company also invests a hefty chunk of change in mortgage-backed securities to give it tax-free REIT status.

Now, before you go running for the hills, it's notable that 99% of CapitalSource's mortgage-backed securities are backed by Fannie Mae (NYSE: FNM) or Freddie Mac. Though this doesn't completely remove the risk, CapitalSource's portfolio is light years away from the subprime CDO holdings that have given so many other firms gigantic headaches. And though a tough economy has the potential to hurt its commercial and health-care portfolios, CapitalSource compensates investors for this risk with a dividend yield of nearly 17%.

TMFMattyA is one of the many CAPS players who've given CapitalSource a thumbs up. A month ago, he backed up his outperform call by writing:

[CapitalSource] is an extremely high-quality lender and specialty finance company whose stock price has been absolutely taken to the woodshed. Its focus is in the health care industry, and all of its residential loans are prime quality. With seasoned and shareholder-friendly management and a huge, yet sustainable, 15 percent dividend yield, [CapitalSource] is a sure bet to beat the market long-term; especially once the furor in the credit markets dies down.

So what do you think? Are these stocks values, or value traps? Log onto CAPS and let the rest of the 85,000-member community know what you think.

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