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 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 often used by value investors.

Sources: Yahoo! Finance and CAPS as of July 22.

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
Where do we even start with American Apparel? How about debt? The company has a bunch of it. On the bright side, its debt load hasn't gotten worse in recent years; it's actually even declined a bit. However, its operations are hardly making a convincing case that the company can shoulder the debt. At the end of 2009, American Apparel's EBIT-to-interest ratio was just 1.2, not a confidence-inspiring number.

Free cash flow turned positive for 2009, but it was a de-stocking of inventory that helped give cash from operations a big boost -- not exactly a sustainable development. And as to more recent results, we have preliminary numbers that tell us the company lost $17.6 million from operations in the first quarter. But we'll have to keep waiting for final numbers from the March quarter because the company still hasn't issued its 10-Q -- despite saying it should be filed by the end of June when it released the preliminary numbers.

The low price-tag on the stock could provide room for speculation, but with red flags flying all over the place, speculation is all it is.

Wendy's/Arby's carries the same two-star rating as American Apparel and a similar price-to-book value, but I see this fast-food group as a far better bet. Now, we don't want to overstate the case here: The company has only been in its current incarnation since late-2008 and results in 2009 were hardly worth writing home about. In addition, the company has a not-insignificant amount of debt, the interest on which is currently eating up over half of the company's operating profit.

But the company does have a decent amount of cash against its debt, and it raked in a significant amount of cash over the past 12 months. The company is also riding on restaurants that are already well-known and established. If you want safe and secure in the fast-food world, the CAPS community clearly thinks McDonald's (NYSE: MCD) and Yum! Brands (NYSE: YUM) are the way to go, rated four stars each. But is Wendy's/Arby's a complete write-off? I'm not convinced.

I can't say that Rait Financial jumps out at me as a particularly appetizing investment. However, the three-star rating from the CAPS community no doubt reflects the potentially big reward in the stock's risk-reward equation. With a market cap of just less than $170 million against a tangible book value of $800 million, investors stand to cash in big if future losses don't eat up all of that equity. Of course, with investment and asset losses upon sale of more than $500 million each of the past two years, that's a pretty big "if."

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

There's simply no other way to say it -- this publicly traded private equity firm was treated badly by the recession. How badly? Well, this month, after a June debt restructuring, the company's auditor's removed "going concern" language from its audit. For those not hip to auditing jargon, the phrase "going concern" usually starts getting thrown around when a company is knocking at death's door.

But the company is trying to prove that it is more than a survivor. The debt restructuring was certainly a step in the right direction, but CEO Malon Wilkus thinks more business could be coming its way as well. Late last month, he said:

The merger and acquisition environment is beginning to perk up, with a growing number of attractive investment opportunities, while the banking industry continues to be highly restrictive in providing middle market growth and transaction financing. As one of the largest sources of middle market and mezzanine finance, we intend to pursue the best opportunities in this attractive environment.

But while opportunity may be knocking at American Capital, CAPS members think an even better place to be is in Jinpan International's stock.

For those not familiar with Jinpan, the company makes cast resin transformers for stepping down power voltage for end-users of electricity. If you think that sounds boring and stodgy, I might agree with you -- except for three things. First, the company is headquartered and has its base of business in China. Think about all of the infrastructure growth in China, and you'll get a sense for why transformers could be an interesting business to be in.

Past that, the company claims that cast resin transformers are safer and more environmentally friendly than their predecessors and are replacing more traditional oil-filled transformers. Finally, the company has gotten involved in the market for wind-power equipment, a key growth area in the alternative-energy world.

Of course, investors thinking about pouncing on Jinpan will have to wade past significant pessimism. Based on its preliminary view of second-quarter results, it looks like Jinpan will now have disappointed investors two quarters in a row. And, even worse, it decided to cut its full-year 2010 guidance -- a move that's guaranteed to draw the ire of investors.

The Foolish way, though, is one that looks beyond this quarter and this year and focuses on long-term opportunity. And according to many Jinpan fans on CAPS, that long-term opportunity is still there.

Make your vote count!
Do you agree that Jinpan 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.

You want stock picks? Well, your wish has been granted. Feast your eyes on this, Fool!