Everyone loves a bargain. Be it at the grocery store, the local flea market, or at 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 investor-intelligence community over at Motley Fool CAPS, I'll once again try to find some cheap stocks for all of my kindred stingy spirits.
The approach is far from complicated: we'll run a simple screen for four- or five-star stocks that have enterprise value-to-EBITDA (EV/EBITDA) multiples below 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 in 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.
Let's dive right into this week's bargain bin:
|
Company
|
EV/EBITDA (ttm)
|
Industry
|
CAPS Rating (out of 5)
|
|
NVIDIA (Nasdaq: NVDA )
|
8.7
|
Semiconductors
|
*****
|
|
America Movil (NYSE: AMX )
|
8.1
|
Wireless communications
|
*****
|
|
3M Co. (NYSE: MMM )
|
7.7
|
Conglomerates
|
*****
|
|
American Reprographics (NYSE: ARP )
|
6.5
|
Business services
|
*****
|
|
Merck (NYSE: MRK )
|
5.7
|
Drug manufacturers
|
****
|
|
Hewlett-Packard (NYSE: HPQ )
|
8.3
|
Diversified computer systems
|
****
|
|
Amgen (Nasdaq: AMGN )
|
8.1
|
Biotechnology
|
****
|
Data provided by Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.
ttm = trailing 12 months.
As usual, our list isn't exactly brimming with exhilarating businesses. But that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's biggest returns.
Well-documented bargain
It's not very often that you find a high-return, market dominator in the bargain bin. Rarer still is finding so many astute investment minds who agree that the stock is cheap. American Reprographics, the hands-down leader in the document reproduction market (primarily for architectural, engineering, and construction firms), is one of those unique situations.
In addition to being both a Motley Fool Hidden Gems and Inside Value pick, 96% of the CAPS All-Stars who've rated the company like it to outperform. Of course, on the other side of that bullish sentiment is none other than Mr. Market himself.
ARP has been beaten down to the tune of 46% in the last year, on concerns about its exposure to the troubled domestic real estate market. CAPS player deadheadz, one of the few ARP bears in our community, summed up Wall Street's thinking with this pitch:
A leading firm in a slowing market that will go [stagnant] by years end. This co. will maintain some income from companies replacing equipment and expanding/modifying current structures but with what will be a year long slowdown in the commercial building trade the only potential in [American Reprographic's] market is slowing.
In true Foolish form, the majority of our community continues to maintain a bigger-picture perspective toward the company.
In particular, Fools cite ARP's solid profitability (gained through its large scale and cost leadership), diversified business mix (less than 15% of revenue is tied to residential construction), and global growth prospects as reasons why the stock's drop is overdone. When you consider that ARP managed to post 17% revenue growth in the latest quarter, and grow free cash flow even more, it's tough not to see a good deal at the current PEG of 0.73.
CAPS All-Star reddingrunner elaborates on the opportunity:
Printing, storing, distributing blueprints: No one else can do the big projects like ARP, all of their competitors are small fry in comparison ... This gives them a big moat on the biggest projects. They may not do anything for a year or so, but once the next commercial building boom begins, watch out! And if they get serious about international expansion, watch out geometrically!
A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation; we want only to generate 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.
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