5 More Frugal 5-Star Stocks

I'll admit it -- I'm a bit of a penny-pincher. I'm notorious for buying really used books online, knowing where to go for the best sneaker deals in town, and waiting patiently for "two-week lows" at the gas pump before filling up my Civic!

Nothing, and I mean nothing, irks me more than paying up for something that, if given enough time, I could probably get at a significantly discounted price.

But unfortunately, finding cheap stocks isn't as easy as finding a good Sherlock Holmes novel for 25% off. After all, stock exchanges don't exactly nail blue-light special signs on certain stocks to let if you know when they're on sale.

Our penny-pinching process
In that spirit, and with the help of our community over at Motley Fool CAPS, I'll once again be looking for some cheap -- but good -- value stocks. The approach is far from complicated: I'll run a simple screen for five-star stocks (the highest rating a stock can get in CAPS) that have enterprise value-to-EBITDA (EV/EBITDA) multiples below 10. I'll be using EV/EBITDA rather than the more common price-to-earnings ratio, so that we can account for differences in each company's capital structure.

In other words, you won't be finding high-profile, high-multiple growth stories like Coldwater Creek and Infosys as part of the Frugal Five anytime soon.

Meet the Frugals
Instead, by running this screen, we'll zero in on statistically cheap stocks that, according to our CAPS community, have plenty of great reasons to trade at much higher levels. Without further ado, here's this week's list of frugal five-stars:

As always, our family of Frugals is dominated by relatively unknown companies domiciled in some boring industries. This week's list comprises a mapping software provider, a diagnostic testing company, a fitness-club chain, a meat-processing company, and an oilfield service provider, respectively.

Not exactly the most stimulating bunch of businesses, are they?

That's OK. Here's a quick summary of two particularly interesting Frugals -- MapInfo and Quest Diagnostics -- as well as what some of our CAPS players are saying about them. Some of the bullish arguments might just keep you from dozing off.

Mapping out a bargain
My favorite stock on this week's list is MapInfo, a New York-based provider of mapping solutions to businesses and governments. The "location intelligence" business is a highly concentrated and competitive one, with rivals including Intergraph and Autodesk (NASDAQ:ADSK). Still, the company's respectable free cash flow generation -- which is typical of most software providers -- combined with a growing market niche, make this stock an interesting proposition.

As fellow Fool Tom Taulli noted last year, Google's foray into the world of online maps helped spark massive awareness regarding the potential of mapping technology. And MapInfo -- whose mapping solutions are designed to help organizations make better decisions -- has benefited from the favorable trends. Recently, the company reported its fourth straight year of double-digit revenue growth, with an 11% increase during fiscal year 2006.

Despite warranted concerns about contraction in some of the company's margins, I like the continued growth in MapInfo's base of recurring revenues, even while the company maintains strategic flexibility with a strong cash position.

All in all, MapInfo's shares are at least worth considering, given its frugal EV/EBITDA levels.

A quest that tests
Our CAPS community also frugally favors Quest Diagnostics, which provides diagnostic testing services to the health-care industry. In early September, shares of the New Jersey-based firm received a nearly 20% haircut when the company announced the loss of its national lab service contract with UnitedHealth. Quest's stock has yet to recover from the fall, but many players in our CAPS community feel the drop was way overdone, leaving Quest a prime candidate to outperform in 2007. I tend to agree.

Even without UnitedHealth's business, Quest Diagnostic remains the world's leading provider of lab services, operating a network of 35 labs and more than 2000 patient service centers. More importantly, Quest's enormous scale and pricing power -- which it commands thanks to specialized testing -- translate directly into substantial profitability.

Over the years, Quest has consistently posted returns on equity in the 20% range and average EPS growth rates around 30%. It's also generated healthy free cash flow relative to sales while maintaining a strong balance sheet. Of course, the loss of a major client such as UnitedHealth isn't exactly reason to jump for joy, but if the market has created a bargain opportunity because of it -- as our CAPS community seems to believe -- new investors might do well to take a closer look.

CAPS All-Star pickthis, for example, believes that Quest Diagnostics passes the tests for authentic value: "I love healthcare and this stock has underperformed. Quality company, nice valuation, great cash flow ... would make a nice acquisition candidate."

A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation. We're only trying to generate some possible ideas that you might find worth further research. If you'd like to search for Frugals of your own, read what our CAPS community thinks, or even chime in with your own opinions, click here to get in the game.

That's all for this week, Fools. Be sure to join me next week, when I'll highlight another batch of Frugals for your perusal. Until then, Frugal on!

Fool contributor Brian Pacampara always collects coupons for "big item" purchases only. He holds no position in any of the companies mentioned. Precision Drilling is a Motley Fool Global Gains pick, while UnitedHealth is both a Stock Advisor and Inside Value choice. The Fool's disclosure policy always pays the right price.