America's Next Top Value Stock

Though value investors have been some of the most successful investors out there, finding good stocks at bargain prices is far from easy. Though markets aren't as efficient as some university professors may want to tell you, they generally do a pretty good job pricing stocks. So while there are good deals out there, you're going to have to break a bit of a mental sweat if you want to make sure that you're investing in the stock equivalent of Brad Pitt, not Kato Kaelin.

Fortunately for us, in the search for stock market values, we have the 165,000-plus members of The Motley Fool's CAPS community voting on which stocks are true stars and which are just posers. To gather some ideas I've dug up a handful of companies valued at less than twice their book value -- a measure that value investors often use.

Source: Yahoo! Finance and CAPS as of June 23.

As you can see, though these stocks all carry value-like multiples, the CAPS community obviously doesn't think that all are worthy of your investment dollars.

No twinkle in these stars
If you're in the apparel business and Gap makes you look bad, chances are you're heading drastically in the wrong direction. But for Abercrombie & Fitch that is exactly the case. Over the past 12 months, Abercrombie has notched a none-too-impressive 5.8% operating margin against Gap's 13.5%, and sales fell by 8.2% for Abercrombie while they were up just shy of 1% for Gap. And despite the diverging performance, Abercrombie shares still trade at a healthy premium to Gap's.

Not that Abercrombie's CEO is likely to lose much sleep. His paycheck has held up quite well, and it's hard to quibble with his other perks. Back in December, my fellow Fool Alyce Lomax put Abercrombie on her naughty list,and CAPS members seem to be in agreement. Far be it from me to disagree.

Interestingly, while Aetna has been stuck with a lowly two stars, the CAPS community doesn't seem to have a pessimistic outlook on all of the health insurers -- both WellPoint (NYSE: WLP) and UnitedHealth Group (NYSE: UNH) carry four-star ratings. Recently, Aetna has notched lower profit margins and a higher valuation than the two competitors, which could explain some of the lower enthusiasm for the stock.

Though I'm not sure Aetna is bad enough to warrant two stars, I'd side with the community and grab WellPoint or UnitedHealth before I went for Aetna. No matter which one you go with, though, I think health insurers are a group to watch -- because I think pessimism over the health-care reform bill has been overdone.

I believe Bank of America falls into the same category of overdone pessimism. I wish I could say that upcoming reform would drastically change B of A -- and, in particular, make it smaller and more manageable -- but I just don't think it will. Instead, I think B of A and the other big banks will get right back to being large, unstable, and superbly profitable.

I'm not sure I'd give B of A's stock more than the three stars CAPS members have given it, at least in terms of a long-term investment, but I think there may be a shorter-term opportunity as reform pessimism subsides and banking profits return.

A five-star is born!
Now that we've left the riffraff behind, we can move onto a stock that CAPS members think is worthwhile: Alcoa.

For Alcoa, the story is all about the economic recovery. As the world's leading producer of aluminum, Alcoa is dependent on good economic conditions to drive the demand for cars, airplanes, buildings, and the wide variety of other products that require aluminum.

The past couple of years have been dreadful for Alcoa, and it's not as if all our worries are behind us quite yet, but CAPS members think the current momentum will be enough to perk up the aluminum market -- and Alcoa with it.

But as much as CAPS members like Alcoa's prospects, it didn't quite have the juice to top this week's top value stock, Mueller Water.

It's a pretty simple equation for Mueller. The company is a leader when it comes to products that go into water infrastructure and treatment facilities and those are the products that will be in high demand in the U.S. ever decides to address its aging infrastructure. Of course, while the need may be quite clear, the "when" and the "how does it get financed" leave a good amount of ambiguity.

But CAPS Dezertenergy thinks that it could happen sooner rather than later:

I think after the dust settles with all the Health Care issues this year and there's a direction that's settled upon it will be time to begin paying attention to infrastructure. And when water and piping issues will be addressed MWA who's been around for a long time will be in the mix and winning bids to replace old piping. There is an outrageous number of water-mains breaking every day and piping under cities are very old and need replacing. There will be enough business for any company involved in pipes, fittings, valves etc... All MWA has to do is get their share of the business and this 5.00 stock should rise a few bucks by the end of 2011.

Make your vote count!
Do you agree that Mueller Water could be America's next top value stock? Click over to CAPS, and let the rest of the community know what you think. And while you're there, you can log your vote for the other stocks that you think should be in the running.

What's better than an outperformer? An outperformer that nobody else knows about.