Everyone loves a bargain. Whether they're at the grocery store, the local flea market, or at the neighborhood car dealership, people inherently understand the benefits of a great deal.
Yet despite this infatuation with bargain opportunities, it doesn't occur to many investors 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
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.
We'll run a simple screen for five-star stocks (the highest rating a stock can get in CAPS) with enterprise value-to-EBITDA (EV/EBITDA) multiples below 10. We'll use this metric, rather than the more common price-to-earnings ratio, to account for differences in each company's capital structure. 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.
This week's bargain bin
|
Company |
EV/EBITDA (ttm) |
Industry |
|---|---|---|
|
Applied Industrial Technologies |
9.0 |
Equipment wholesale |
|
ONEOK |
7.8 |
Gas utilities |
|
Carrols Restaurant Group |
7.4 |
Restaurants |
|
Ensco International |
6.8 |
Oil and gas drilling |
|
EnPro Industries |
6.2 |
Industrial equipment |
|
Pioneer Drilling |
3.6 |
Oil and gas drilling |
|
Ternium |
3.3 |
Steel and iron |
As usual, our list isn't exactly brimming with exciting or familiar names. But that should be just fine with us. As sharp Fools know, boring stories often translate into the market's biggest returns.
This ONE's OK
It doesn't take a genius to soundly thump the market. Sometimes, it's as simple as finding a stable, century-old dividend-distributor to invest (and reinvest) in. With 44 All-Star supporters (and no such detractors) in our CAPS community, ONEOK, a diversified energy company that recently celebrated its 100th anniversary, may be one of those solid stocks for the long run.
Over the last few years, ONEOK has been an income investor's dream. In fact, it got the nod from our Motley Fool Income Investor service in its December 2005 issue. After a relatively constant payout throughout the '90s, ONEOK's dividend has doubled since 2003. It's no wonder that the stock has delivered an average annual return of roughly 30% over the same period. Of course, that's all in the past. Whether ONEOK investors can still replicate (or even approach) those returns is another story.
Despite ONEOK's bargain-bin ratio, a 53% run-up over the past year has the stock currently yielding 2.8% -- its lowest yield in decades. Of course, that generally happens when your business is firing on all cylinders. In ONEOK's case, the distribution segment grew operating income more than 30%, while its energy services segment increased operating income approximately 29% for Q1. I'm always a bit weary about jumping into a business (and a stock) that's so red hot. But for Fools unafraid of a little positive momentum, there are plenty of reasons to like ONEOK, even at these levels.
Most obvious, CEO John Gibson has repeatedly asserted that the stock remains undervalued. ONEOK's strong cash flow has allowed management to buy back 15 million shares in the past two years, with another 7.5 million-share repurchase currently being authorized.
In addition, a solid financial position enables the company to fuel the growth of its 45.7%-owned business, ONEOK Partners -- a master limited partnership expected to undertake $1.5 billion in capital projects over the next few years. With further dividend increases, buybacks, and growth coming from ONEOK partners, this 100-year-old geezer might actually keep outrunning Mr. Market.
CAPS All-Star NetscribeEnergy likes natural gas in general, and this company in particular:
The higher and continued demand of natural gas will help ONEOK generate stable revenues streams, as the U.S. accounts for most of the inflows.... With positive industry synergies, organic growth projects and higher expected earnings from partnership business, ONEOK represents a good investment opportunity.
CAPS player 50day, meanwhile, gets straight to the point:
Founded in 1906. What I picture is a bunch of old school business men that don't monkey around with the company's or the stockholders' money. No fat stock options deals, no cooking of the books, and no bull. All business. Plus, we're paid a nice dividend to hold the stock.
Finally, CAPS All-Star LurkyLurky leaves us with a simple strategy: "Great company with steady stock appreciation, that's been raising its dividend for years. I would like to buy this on a dip."
A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation. We're just trying to generate some ideas you might want to research further. 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.
It's totally free -- an offer that even the deepest of value investors should never pass up.
For more inexpensive Foolery:
ONEOK is a Motley Fool Income Investor pick. Discover our entire lineup of dynamic dividend payers with a free 30-day trial subscription.
Fool contributor Brian Pacampara has been tracking the stocks used in this column. Currently, TheFrugals are ranked 45th out of 31,133 portfolios. You can check it out here. Brian owns no position in any of the stocks mentioned. The Fool's disclosure policy always pays the full price for transparency.
