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:

Company

CAPS Stars
(out of 5)

2004 Price-to-Book Ratio

Return Since

CompuCredit (Nasdaq: CCRT  )

***

1.52

(76.4%)

Jones Apparel Group (NYSE: JNY  )

**

1.68

(49%)

Freddie Mac (NYSE: FRE  )

*

1.70

(96.2%)

American Axle & Manufacturing (NYSE: AXL  )

*

1.84

(79.1%)

Electronics for Imaging (Nasdaq: EFII  )

*

1.69

(47.1%)

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 140,000-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 17 stocks that CAPS found hiding in the weeds, Sun Healthcare Group (Nasdaq: SUNH  ) intrigues me this week. The details:

Metric

Sun Healthcare

Recent price

$8.28

CAPS stars (out of 5)

*****

Total ratings

234

Percent bulls

97.4%

Percent bears

2.6%

Price-to-book

0.85

ROE

26.1%

% Above 52-week low

12%

Sources: CAPS, Yahoo! Finance.
Data current as of Aug. 27.

Two statistics jump out at me when I read this table. First, return on equity, at more than 26%, speaks well of management's ability to put shareholder equity to good use -- a positive sign for long-term investors.

Second, Sun Healthcare trades for below book value, and we've seen some big book value winners over the past year. JetBlue (Nasdaq: JBLU  ) , which traded for slightly less than tangible book value on Jan. 2 of last year, ended 2008 up 23.9%.

Yet Sun Healthcare isn't as good a book value tale as JetBlue was; the stock trades for a little more than seven times its tangible book value as of this writing. Still, with ROE as high as it is, I'm inclined to give this stock a closer look, especially now that Sun Healthcare is paying down debt.

And I'm not alone. "This is a well-run company," wrote CAPS All-Star greenwave3 earlier this month:

Despite management complaining about low margins, [Sun Healthcare] is still gushing with free cash flow. This one looks really cheap. Even with lower margins, [Sun] is still a cash cow.

Agreed, but that's also just one Fool's take. Would you buy shares of Sun Healthcare 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 (31) | 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 28, 2009, at 7:47 PM, DeborahCalvert wrote:

    Sun is a cash cow? They did it by cheating my family out of wrongful death when my mother was killed in one of their nusring homes, according to their own medical director Dr Scott Stoney in Newport Beach, California.

    Even w/ dbl pneumonia SUN Healthcare forced Evelyn Calvert 2 get up and dressed by 5:30am, I found out on a surprise visit, as she was then made to sit in the hallway 2 wait for the dining room doors 2 open at 8:00 am, b cuz SUN understaffed and simply put, 5-7 CNAs that arrive at 7am cannot dress 59 patients in one hour. Sun's Medical Director interceded stating no sick patients were 2 be made 2 sit up. This was common place: Thirsty? Back in an hour; Need bathroom? sorry we use diapers here; U need a Dr? Call 911; Fever? r thermometers broke; Hot? HVAC condemned by State; Cold? HVAC condemned; Can't breathe? No Ventiliation? Did I mention the HVAC is condemned? BTW ur oxygen tank ran out -no staff 2 monitor oxygen tanks; Looks like u had a stroke b cuz r b/p monitors broke, u'll never swallow again -sorry; u contracted MRSA from us -so sorry 2 tell u this but now u will die. Sure enough, seven months later our mom was dead from their callous behavior.

    Calverts sued SUN but were cheated out of treble damages when we could prove SUN's willful misconduct by two board members. The Risk Mgr wrote a letter 2 us it was OK w/ him not 2 have a working HVAC sys 2 patients rooms, while under an existing injunction from the State of Calif barring SUN from ever having a broken HVAC system since they killed patients in a Burlingame, Calif facility in 2000. The CEO and Dr Hunker could have been terminated 4 good cause. Just recently the board of directors of Sun Healthcare Group has been informed.

    Deborah Calvert, Newport Beach, CA

  • Report this Comment On August 28, 2009, at 7:48 PM, QwertyHero wrote:

    Still too high. I'll buy @ $7.00

    Too many questions regarding Obama, Obamacare, and if it's too late to stop him from destroying the economy.

    If Obamacare legislation goes through - and liberals seem intnet on riding Ted Kennedy's bloated carcass across that finish line - then healthcare takes a dump and you will be left holding the colostomy bag.

  • Report this Comment On August 28, 2009, at 7:57 PM, DeborahCalvert wrote:

    When Calverts family sued Sun Healthcare for wrongful death their attorney took advantage of fighting siblings. When he was sued for malpractice he died 2 weeks after learning I'd retained a malpractice attorney, Eugen Andres of Andres & Andres in Santa Ana, California. Think he was stressed? Seven months earlier in mediation this attorney, Daniel Leipold, thereatened me for the CEO of Sun Healthcare stating if I forced the case to trial he would make me out to be a crazy woman and rip me a new A.

    I'll testify to this under oath in any court of law. It is the truth and I believe I can prove the "attorneys in the other room" were on the phone with the CEO in his Irvine offices, like I was told.

    Disgusting corporate behavior? Their board of directors will decide.

    Deborah Calvert, Newport Beach, California

  • Report this Comment On August 28, 2009, at 8:07 PM, QwertyHero wrote:

    It is impossible to be "cheated out of treble damages" as treble damages are not intended as compensation. Treble damages - for those of you who are not aware - are used to punish the accused for their willfull misconduct and act as a disincentive for future misconduct. Essentially, the court awards TRIPLE the amount of actual/compensatory damage suffered by the plaintiff (as determined by a Jury or Judge) but since there is nowhere to put all that money - it is awarded to the plaintiff - it is NOT compensation.

    Here, the court must not have found any conduct on the part of SUNH as willfull. Which means $$$ for Deb.

    Too bad you missed out on all that money Deb... you seem really broken up about it - one wonders why if, you felt things were so bad, you left your mother there to die?

  • Report this Comment On August 28, 2009, at 8:34 PM, DeborahCalvert wrote:

    Sun's medical director, Dr Scott Stoney, declared SUN killed Evelyn Calvert in 2006. The cheating of treble damages was done when Calvert's attorney Daniel Leipold failed to pursue them while having written evidence proving same. A letter from SUN's risk Manager, Dr Hunker, stated it was ok with him the facility had no HVAC system while under an injunction barring them from it. That is willful misconduct. Not hard to prove when five patients clearly died by my direct observation from the fault of Sun violating this injunction.

    Dr Scott Stoney, Newport Beach, California, wrote a scathing review I'll quote here:

    "There are several incidences of concern in this patients' case which should be noticed. The frequency of her recurrent pneumonia is concerning as well as the type of pneumonia which she developed were concerning. The infection incidence at Sunbridge Newport was monitored quarterly and it was noted over the national average during infection control meeting in the final quarter of the year 2003. As I was medical director for this facility I had request further evaluation by the staff to the etiology of this occurrence within the facility. Multiple families had complained about this problem. Unfortunately, the administration did not take due diligence in ameliorating this problem in 2003. Lack of sufficient ventilation contributes to pneumonia. This was a sentinel event; however the administration continued to give both patients families and the undersigned a variety of excuses why it was "taking some time" to fix this problem. Upon review of the medical record, it is medically probably that this patients recurrent pneumonia (especially MRSA) was related to the physical facility.

    There is another incidence of concern. Blood pressure monitoring cuffs which were not working in Sunbridge Newport in 2003. This, again, was a sentinel event and of grave concern. As medical director, this was an extraordinary event which prompted my immediate reaction as Medical Director to request the administration immediately order new blood pressure equipment for the safety of the patients within the facility. I was subsequently directly in contact from my Newport Beach private practice office with Bureau of Medi-Cal Fraud and Elder Abuse Special Agent Supervisor Joseph Fendrick to discuss this matter. Unfortunately this was too late for Mrs. Evelyn Calvert, she arrived 7/16/04 to the emergency room in again respiratory distress and she died. Due to the limited response of the administration to meet patient needs, I resigned from Sunbridge Newport Rehabilitation in March, 2004 and gave sixty day notice of my termination as Medical Director from the facility. It is my opinion, as a Board Certified physician ..... that this patients death is within medical probability aggravated or in causation by the failure of the ventilator system within Sunbridge Newport as well as the failure of the blood pressure monitoring devices within the facility."

    Understand rubberband?

  • Report this Comment On August 28, 2009, at 8:47 PM, DeborahCalvert wrote:

    Again, the board of directors of Sun Healthcare Group Inc has just recently been advised of the behavior of these clowns and the death of Mr. Daniel Leipold under such circumstances. In fact within days of learning I'd retained a malpractice attorney to sue him, the CEO of Sun filed for a restraining order against me for stating he as manager and SUN were slumlords. Judge Gregory W Jones rsponded with a loud "NO, she's not dangerous to him or anyone, he's the dangerous one, he killed her mother. She did a whole lot less than I would have done, at least she didn't state that. They are slumlords and she has proven it, certainly she can state it. Freedom of speech, peaceful protest and protected speech. She should file a slapp back lawsuit for his malicious prosecution. And, you just introduced an email she states she doesn't even know what he looks like, how can I ask her to avoid someone she doesn't even know?" My attorney replied that SUN certainly couldn't expect me to carry around a family pix of the CEO -the man who killed your mother, so I could avoid him!

  • Report this Comment On August 28, 2009, at 9:18 PM, QwertyHero wrote:

    You're crazy.

  • Report this Comment On August 28, 2009, at 9:33 PM, DeborahCalvert wrote:

    It'll all be in the news soon. Numerous death cases against SUN will use documents I have and my testimony and Dr Stoney's testimony to their favor. They're sunk.

  • Report this Comment On August 28, 2009, at 10:08 PM, DeborahCalvert wrote:

    Yes, the attorney Tom Swann, will not lie -he has a license to practice law and won't jeopardize it for these clowns!

  • Report this Comment On August 28, 2009, at 10:28 PM, QwertyHero wrote:

    crrrrrrrrrrrrrrrraaaaaazzzzzzzzy

  • Report this Comment On August 29, 2009, at 12:48 AM, QwertyHero wrote:

    No, I'm an attorney and a human being possesed with common sense and familiarity with the actions of a sane person and those of an insane person.

    This woman is certifiable.

    Refers to herself in the third person throughout - shows absolutely ZERO remorse at the death of her mother - only that she was "cheated" out of money. Also has all sorts of crazy conspiratorial claims about people on phones - and making insults on the behalf of thrid parties not present - and attorneys who died after she brought suit against them presumably because they were overcome by guilt.

    Not to mention the fact that she is advertising her availability, online, in an investment blog, to appear as a witness in a non-existant lawsuit, apparently on the off chance an attorney reads her inane ramblings and decides to file suit on her behalf...

    Shes nuts.

    And despite your namesake, "Truthisntstupid" you must be pretty dim if you think otherwise. Although with that moniker I suspect you might be a looney-toon too.

    Anywho - buy @ $7.00!!!

  • Report this Comment On August 30, 2009, at 4:46 PM, stevearoony wrote:

    Wow, we are all looking for safe investments. Realestate was always bullet proof,but really did surprise many of us. Now some of us always are smart enough as to diversify and look to stock options, annuities, gold, silver, mutial funds, etc. I was wanting to invest in Sun Inc. and did my due dilligence in research until I read what the Calvert VICTIM had to state and her doctor's statement. Wow, or should I state "WOOOOW!!!!!!" To the attorney that does not have the credentials to declare some one as certifiably insane or "craaaazy", but does have the credentials to defend a multimillion dollar profiting company are you one of them that represents Sun Inc.? Did you read the ladies statement that she posted on behalf of her doctor? It sounds like the poor women has been through enough with Sun. Inc. and you have to go far enough as to add "INSULT TO INJURY!!!!!" WOOW I THINK YOUR CRAAAAZY!!!!" OR JUST A CALLLUOUSE JEEEERRRK. Any who-buy @ $7.00!!! I think not!!!! The way this is all transpiring I think I will buy at $3.00, because that is what will probably happen to Sun. Inc. with all of this negitive plublicity!! We investors / consumers are not FOOOLS NOR CRRAAAAZZY NOR STUUUPID. We can see it for what it is worth. Does any one know in there is an on going investigation by the government? If so I wont even buy @ $3.00!!!!

  • Report this Comment On August 31, 2009, at 11:55 PM, DeborahCalvert wrote:

    So sorry to give you all bad news about Sun Healthcare stock, but Sun Healthcare would have sued me by now if I didn't have the proof they killed my mother and four other patients I witnessed.

    There may be a shake up amongst the board of directors in the coming months. Evidence of wrongdoing by the CEO has been presented to various board members, as he violated SUN's California injunction knowingly and risked deaths in a Newport Beach skilled nursing facility, against better judgment. Then cheated the Calvert family out of wrongful death when he gave threatening messages during mediation to myself through my attorney, Daniel Leipold, whom I sued successfully for malpractice and who died just two weeks later. It's all a matter of fact and all over the internet, easily searchable by google.

    Deborah Calvert, Newport Beach, California

  • Report this Comment On September 01, 2009, at 12:16 PM, DeborahCalvert wrote:

    Attorney Lisa Cross of Fonda & Fraser, LLP in Anaheim has the evidence, information and facts. She is also responsible to provide the entire board of directors of Sun Healthcare with information about two board members who violated the injunction and are eligible for termination due to deaths caused from thei inaction.

    It will be interesting to see how this is handled in the near future.

  • Report this Comment On September 01, 2009, at 4:00 PM, DeborahCalvert wrote:

    Read the New York Times lately?

  • Report this Comment On September 02, 2009, at 3:53 PM, wantingtoinvest wrote:

    This is all to amazing!!! It appears that there is a real problem with this company and that is not an over exsagerated statement. We all know some one who knows some who has a friend and or a reletive in a care facility / retirement home/ etc. It appears that we are all getting older and that these places may have to be a neccesary evil? I am liberating my father from one of these places and he has know complaints, because he is in a position to complain. What about the elders that can not speak up for themselves? I think the C.E.O. of Sun. Inc. is some sort of reprobate!!!! Maybe the board of dictators, I mean directors are reprobates or just cold hearted mental case. Has this victim ( Ms.Calvert) done what she could and just ended being a victim of corprate America? Hey Calvert thanks for standing up. It reminds we consumers / investors that cheap is not always a good thing!!! O, and Stevearoony may really have a point. I would not even buy at $3.00 per share, do to the bad plublicity that Sun Inc. is getting. Hey Mr. attorney that seems to have credentials to deem some poor victim crazy over the internet. Did you read the VICTIMS / Calvert's medical statement from the doctor? Your advise will not be considered for this investment!!!! Money is fun to make just as long as it is not blood money!!!! You must take some pretty strong seditives to be able to sleep at night!! Hey Mr. attorney will you be planning to live in one of those places when you get old????!!!!!???

  • Report this Comment On September 02, 2009, at 9:06 PM, greenwave3 wrote:

    Wow, I am overcome by sensationalism reading these comments. Are you looking for an attorney to represent you?

  • Report this Comment On September 02, 2009, at 9:53 PM, DeborahCalvert wrote:

    Call me 949 548-2080

    Debbie Calvert

  • Report this Comment On September 02, 2009, at 9:55 PM, DeborahCalvert wrote:

    I have documents that show how the CEO of Sun Healthcare and it's risk manager, Dr Chauncey Hunker, knowingly violated SUN's state injunction in California with understaffing and broken equipment that killed my mother. Julie Campbell, a regional employee, apologized for the CEO when my mother stroked from their lack of care and all of the above... Their medical Director Dr Scott Stoney wrote a medical review that they killed her and he quit from their lack of response to his demands to repair broken equipment and staff according to law. He is an excellent witness for anyone suing for a death.

  • Report this Comment On September 02, 2009, at 9:57 PM, DeborahCalvert wrote:

    Dr L Scott Stoney

    Newport Beach, California

    949 548-4580

  • Report this Comment On September 02, 2009, at 10:07 PM, DeborahCalvert wrote:

    I'll post documents on the internet reflecting how the state of California condemned the HVAC system one year before my mother died. Other patients, like Richard Laga, was neglected when he needed a wound care nurse and died months later from gangrene -fined by the Dept of Health for his death, but not $100,000 which is usual. Ask Marie Trembath, former nurse at DHS why. She cried at his bedside when she told him he would not live. She saw how the DHS handled the complaints about SUN -they turned a blind eye. Why? The Dept of Justice also did. They instead of prosecuting these clowns for wrongful deaths in this Sunbridge Newport Beach facility went after the employees of an Escondido facility then dropped all charges. That's how they enforced the injunction against Sun. They didn't. Why?

    CORRUPTION!

  • Report this Comment On September 02, 2009, at 10:13 PM, DeborahCalvert wrote:

    Yes I'm angry and won't let my mother's death be forgotten. I refused to sign confidentiality agreements after being threatened in mediation, ask Tom Swann he'll tell you the t-r-u-t-h. He was an attorney representing SUN who will no longer represent SUN! Ask him, Diamond Bar, California.

    These clowns are going to be revealed for what they have done to make profits -blood money. It is disgusting.

  • Report this Comment On September 02, 2009, at 10:24 PM, JibJabs wrote:

    "and attorneys who died after she brought suit against them presumably because they were overcome by guilt."

    She said stress, not guilt. QwertyHero - she sounds incredible stressed out, which would make sense if her mother had been fatally neglected in retired living only to see a sales pitch on an investment board for the guilty parties. There is a very real possibility you are dead wrong and ignoring that possibility makes you a world-class jerk.

  • Report this Comment On September 02, 2009, at 10:30 PM, DeborahCalvert wrote:

    Why hide when you live like a "billionaire", private jets, numerous homes all over the country, a multi-million dollar corporation who doesn't know your real character?

  • Report this Comment On September 02, 2009, at 10:33 PM, DeborahCalvert wrote:

    There's a big difference between stressed out and pissed off!

  • Report this Comment On September 04, 2009, at 10:16 PM, HarryCarysGhost wrote:

    I'll short this just on principle.

  • Report this Comment On September 09, 2009, at 12:23 AM, DeborahCalvert wrote:

    To Qwertyhero: You must be a SUN Healthcare Group Inc attorney because that it exactly what the CEO said he'd do if the truth were told in the press -make me out to be crazy.

    Interesting how the Dept of Justice didn't fine SUN for violating the permanent injunction by killing patients like Richard Laga, Betty Harness, Stella Carter and Evelyn Calvert in their Newport Beach Sunbridge facility. Neither did the Dept of Health fine the usual $100,000 for a death in this facility. I wonder how much that cost Sun Healthcare to cover up? I wonder how much my late attorney Daniel Leipold was paid to lie to me about the law in mediation?

  • Report this Comment On September 09, 2009, at 12:24 AM, DeborahCalvert wrote:
  • Report this Comment On September 10, 2009, at 8:40 PM, DeborahCalvert wrote:

    What's amazing about this CEO of SUN is that he actually said in a released statement today "the reimbursement environment" when adjusting the books by $10 Million. Either the government reimburses for it or it doesn't, you'd think he'd know. I think someone needs to look into my claims how he threatened me through my late attorney in mediation to save SUN from treble damages and his job. The board of directors as well as their attorneys Fonda & Fraser LLP in Anaheim, California have the evidence. Think they'll share it with the shareholders as required by law?

    hummmmm

  • Report this Comment On September 10, 2009, at 10:50 PM, DeborahCalvert wrote:

    Tom Swann was at the mediation in May, 2006 when Dan Leipold got the message from the CEO of SUN to threaten me. I'm sure he won't lie for anyone -his wife works for a federal judge.

  • Report this Comment On September 15, 2009, at 10:06 PM, Fool wrote:

    EFII is

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