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 very interesting academic research on stocks. 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 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 110,000 investors.

Company

Tangible Book
Value Multiple

1-Year
Change

CAPS
Rating

Cincinnati Financial (Nasdaq: CINF  )

0.9

(35%)

***

Axis Capital Holdings

1.0

(22%)

****

Coeur d'Alene Mines (NYSE: CDE  )

1.0

(12%)

****

Westar Energy

1.2

(5%)

*****

OmniVision Technologies (Nasdaq: OVTI  )

1.4

(17%)

****

Data from CAPS, Yahoo! Finance, and Capital IQ, a division of Standard & Poor's, as of June 20.

Five years ago, oil driller Transocean (NYSE: RIG  ) would have made this list, with its 1.0 tangible-book-value multiple. Since then, though, the stock has caught a serious tailwind from rising oil prices and is up 561%.

While we can't expect that all of these are going to perform like Transocean did, the CAPS community thinks that these are some good choices when it comes to value stocks. With that in mind, I thought I'd dig in a little further into the story of Income Investor recommendation Cincinnati Financial.

Heartburn in Cincinnati
Good insurers like Cincinnati Financial can make money over time by writing conservative insurance policies that consistently leave them with a profit from underwriting. The big bucks in insurance, though, come from the insurers investing the float they're holding.

Many insurers go the easy and -- typically -- safe route and invest primarily in very highly rated fixed-income securities. However, others like Berkshire Hathaway (NYSE: BRK-A  ) , Markel, and, of course, CinFin, are known for their skill in investing their float in a healthy chunk of common stocks to boost their investing returns.

Lately, both of these sources of income have taken a hit for CinFin. In honor of the late George Carlin and his love of words, we might even say that CinFin has looked less like an insurer lately, and more like a not-so-surer. (OK, I know Carlin was much better at this).

On the insurance side, CinFin's core customer base in the Midwest has been racked by storms recently that have produced record losses for the company. The company announced that as a result of these storms, it expects its full-year combined ratio to be greater than 100. In other words, it's going to lose money on its underwriting this year.

Meanwhile, CinFin's investment portfolio has been taking its lumps lately as well. The company's largest holding, Fifth Third Bancorp (Nasdaq: FITB  ) , has been absolutely creamed by the current financial mess, and its shares have lost more than 50% since the end of the first quarter. CinFin expects that loss will shave $3 off its book value per share, and weakness in the rest of its portfolio could lead to an overall 10% drop in book value.

But with the stock now down nearly 40% from its 52-week high, is it time to think about CinFin's long-term success and pick up shares in the face of weakness? Many players on CAPS seem to think so. Back in March, CAPS All-Star MFBriguy picked Cincinnati Financial to outperform, noting:

In general, I like insurance companies trading at/near book value ... that consistently have a combined ratio below 100 (meaning they actually make money selling insurance, which is not as common as you would think as too many insurance companies lose money writing policies and make it up investing float). This means they are cheap and good at their core business. Being a Cincinnati company, they are also very conservatively managed. Throw in a nice dividend and a record of increasing it and this is a good buy.

So what do you think? Are these stocks values, or value traps? Log onto CAPS and let the rest of the 110,000-member community know what you think.

More CAPS Foolishness:

Cincinnati Financial is a Motley Fool Income Investor recommendation. Berkshire is both an Inside Value and a Stock Advisor pick and The Fool owns shares. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool’s disclosure policy wouldn't know a value trap from a hole in the wall, but then again, the disclosure policy is just an inanimate collection of words.


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  • Report this Comment On March 06, 2009, at 11:41 AM, Inthebreadline wrote:

    Here's what Dorfman over at Bloomberg was saying about GM in 2005: Despite its many problems, I think General Motors is a good buy for patient holders at the present price of about $32. That works out to 0.71 times book value and 0.09 times revenue. The dividend yield is 6.3 percent. Book Value don't mean squat when you can't pay the bills.

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