Don't Miss This Cheap Stock

Cheap stocks can get cheaper. They often do.

Unfortunately, "cheap" is a relative term. Precious few stocks that trade for low price-to-earnings ratios or below book value are real bargains. They look enticing but are instead value traps -- stocks that deserve the multiples for which they trade, and punish the garbage-grabbers who buy them.

But don't take my word for it. Here are five "cheap" stocks that trapped bargain-hunting prey:


CAPS Stars (Out of 5)

2004 Price-to-Book Ratio

Return Since

Century Aluminum (Nasdaq: CENX  )




UTStarcom (Nasdaq: UTSI  )




XL Capital (NYSE: XL  )




Ford (NYSE: F  )




Borders Group (NYSE: BGP  )




Sources: Motley Fool CAPS, Capital IQ, Yahoo! Finance.

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from professor Aswath Damodaran. In his book Investment Fables, Damodaran counsels investors to measure low price-to-book stocks by their returns on equity (ROE).

Makes sense to me. Book value is shorthand for equity. A low price-to-book stock is priced as if management won't produce high returns from the equity capital afforded it. Find a stock that defies this maxim -- a stock with an above-average and rising ROE -- and you may have found a bargain.

A machete for when you're in the weeds
Our 135,000-member-strong Motley Fool CAPS database is a great place to start your search. I ran a screen for well-respected stocks trading for less than twice book value, and whose returns on equity were 10% or more. Qualifiers were also trading no more than 25% above their 52-week low, leaving plenty of room for further gains.

Of the 11 stocks that CAPS found hiding in the weeds, CBIZ (NYSE: CBZ  ) intrigues me this week. The details:



Recent price


CAPS stars (out of 5)


Total ratings


Percent bulls


Percent bears






% Above 52-week low


Sources: CAPS, Yahoo! Finance.
Data current as of Aug. 17.

CBIZ is a business services firm that our CAPS investors like for its comprehensiveness, among other things. "CBIZ is a one-stop shop and partner for businesses of all sizes, non-profits and government entities across 140 offices in 36 states," wrote CAPS All-Star warbowl in February. "It provides direct services and/or brokerage services in accounting, tax advice, insurance, benefits, IT, finance and more."

But warbowl also likes the financials:

CBIZ has lots of cash, continues to buy up shares, as well as other companies to add to its bag of tricks. Seven straight years of 20% EPS growth from continuing operations, projected positive growth through the recession as employers look to CBIZ to help them control costs. Expect CBIZ to be a dependable stock for the long haul with lots of room to grow from its current small cap size — stick with it and you will be handsomely rewarded.

Agreed, if only because a tighter economy demands that non-essential corporate services be outsourced as cheaply as possible. This is a massive opportunity for CBIZ and peers such as Income Investor recommendation Automatic Data Processing (NYSE: ADP  ) .

But that's also just my take. Would you buy shares of CBIZ at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

More bargain basement Foolishness:

Want further guidance? Get 30 days of free access to the Fool's Inside Value service, which spotlights stocks that Mr. Market has put on sale. Automatic Data Processing is an Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is a bargain at any price.

Read/Post Comments (1) | Recommend This Article (13)

Comments from our Foolish Readers

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 August 22, 2009, at 5:03 PM, Jcornn wrote:

    Tim, I wonder at the comments made by brokers/analysts sometimes but I think I will look for

    your comments in the future. I confess I was a garbage grabber in the case of one of your picks

    (FORD). I bought the stock at $2.20 and today it is floating at roughly $7.75 which according to my calculator,which I bought at Walmart, that appears to be about a 350% increase in cash value should I decide to sell today.

    Thank you,


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12/31/1969 7:00 PM
BGPIQ.DL $0.00 Down +0.00 +0.00%
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