5 Top-Rated Value Stocks

Are you familiar with the dynamic duo of Fama and French? No, they didn't sing "Maneater" -- that was Hall and Oates. And no, they didn't star in Black Sheep -- 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 nonvalue 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 Motley Fool CAPS community of more than 105,000 investors.

Data from CAPS, Yahoo! Finance, and Capital IQ as of June 6, 2008.

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 a little further into the story at the two reinsurers on our list.

Re-examining reinsurance
As with other valuation multiples, it's important to note that book value multiples typically vary from industry to industry. When it comes to insurance and reinsurance in particular -- where book value is an important valuation measure -- book value multiples tend to stay on the low end, and it's unlikely you'll ever see a multiple of five or 10, as you might in the technology or health-care arena.

With this in mind, let's look at the two quality reinsurance outfits on our list -- RenaissanceRe and PartnerRe -- which are both trading at 1.2 times their tangible book value. Looking back over the trading history of both companies, we can find that their tangible book value multiples have ranged from as low as one to as high as 2.8. So if we take today's multiples in context of the past, we could conclude that shares of both companies are on the cheaper end of the scale.

The next logical question is why investors would be bidding down the reinsurers right now. Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) Warren Buffett has been very vocal over the past couple of years that competition is once again heating up in the insurance and reinsurance industries. This is expected to crimp the profits of even the highest quality insurers -- like Berkshire -- as well as hamper growth.

For those that are crazy enough to believe that investing is more like a marathon than a 40-yard dash, the stocks of insurers are typically the most attractive during an industry down-cycle. Investors locked into the Wall Street rat race predictably abandon these stocks due to the short-term shrinking profits, and thus create great deals on solid businesses. The same hasty investors are some of the same who help push stock prices back up when the industry is well into the next up-cycle.

CAPS players seem to think that the stocks for both RenaissanceRe and PartnerRe are pretty attractive, as their valuations remain below historical averages. Early last year, CAPS All-Star sandvig added PartnerRe to his CAPS portfolio, reasoning:

In omnia paratus - Prepared for all things.

I like [PartnerRe] for the same reasons I like [MontpelierRe (NYSE:MRH)]. They have a P/E ratio below 6, have a price to book ratio of 1.05, have a decent return on equity (21.9%), and have very little debt. Also, it looks like the insiders are buying. They are prepared for disasters, and if they can avoid them, they will do very well.

So what do you think? Are these stocks values, or value traps? Log onto CAPS and let the 105,000-member community know what you think.

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