Top-Rated Stocks in the Bargain Bin

Everyone loves a bargain. Whether at the grocery store, the local flea market, or the neighborhood car dealership, people inherently understand the benefits of getting a great deal.

Yet despite this infatuation with bargain opportunities, few investors realize 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 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 stocks rated with four or the maximum five stars, with 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
This screen will help us 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 in this week's bargain bin:

Company

EV/EBITDA (ttm)

Industry

CAPS Rating

CSX (NYSE: CSX  )

9.5

Railroads

*****

EMC (NYSE: EMC  )

8.6

Data Storage Services

*****

Noble (NYSE: NE  )

8.3

Oil & Gas Drilling

*****

Cemex 

7.8

Cement

*****

Southern (NYSE: SO  )

9.3

Electric Utilities

****

Alcoa (NYSE: AA  )

8.2

Aluminum

****

Honeywell International (NYSE: HON  )

8.0

Aerospace & Defense

****

Data provided by Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS as of July 14, 2008. ttm = trailing 12 months.

As usual, our list isn't exactly brimming with the most 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.

Defense mechanism
Value investing is all about playing defense, and according to our community, Honeywell International does so in more ways than one. Of the 271 CAPS All-Stars who've rated the dividend-paying aerospace and defense behemoth, an overwhelming 95% believe it will outperform.

Specifically, our community is attracted to the stock as a blue-chip way to recession-proof your portfolio. Even as the global economy appears to lose steam, and the U.S. continues to suffer from the credit mess, Honeywell managed to grow its first-quarter earnings 22%. Even more impressively, as my Foolish colleague David Lee Smith pointed out, Honeywell managed to grow sales in each one of its divisions. Analysts are forecasting profit growth of 17% for the next quarter, and double-digit increases for the next five, so Honeywell's recent wave of strong performance is certainly expected to continue -- and for good reason.

Over on CAPS, members point to Honeywell's leadership position within aerospace and automation & control -- industries that stand to benefit from strong long-term tailwinds -- as the primary reason to remain bullish. With manufacturers like Boeing (NYSE: BA  ) and Airbus continuing to post relatively healthy order rates and backlogs, Honeywell seems well-positioned for the long run.

Of course, Honeywell currently trades at a PEG ratio of 1.2, so Mr. Market probably has most of that growth discounted. But with a management team that consistently uses cash flows to raise the dividend and buy back shares, as well as a stock price that's been sliding over the last couple of months, Honeywell looks like a high-quality company trading at a reasonable price.

CAPS All-Star odenpaul summed things up with this honey of an argument back in November:

What's not to like about Honeywell? Good growth, especially in aerospace, and not particularly affected by the housing slowdown. Honeywell does a large amount of overseas business as well, where aerospace is experiencing tremendous growth, along with the business jet market in both the U.S. and overseas.

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 some possible 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.

Cemex is a Motley Fool Global Gains and Stock Advisor selection. The Fool owns shares of Cemex. Southern is an Income Investor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Pacampara has been tracking the stocks used in this column via TheFrugals, which are ranked 553 out of more than 110,000 portfolios. He owns no position in any of the companies mentioned. The Fool's disclosure policy always pays the full price for transparency.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2008, at 1:54 PM, luscious25 wrote:

    i for one am a bargain shopper while there has been massive sell off in the market i have been buying stocks that are at a great price while my growth stocks are taking a hit i am calmly buying more while my defensive stocks are shoring up my portfolio increasing in value a diverse porfolio rocks.

  • Report this Comment On July 15, 2008, at 6:28 PM, TexasLonghorns wrote:

    Noble is the one to watch here!

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