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5-Star Stocks Begging to Be Bought

By Morgan Housel - Updated Apr 5, 2017 at 7:52PM

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These stocks are just too cheap to ignore.

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful"
 -- Warren Buffett

Can't argue with that, can you? I don't need to remind you of how much fear is in the market these days. But that fear is also creating abundant opportunities for investors patient and diligent enough to search for the babies thrown out with the bathwater.

Using our Motley Fool CAPS ranking system's nifty screening tool, I looked for companies with the following characteristics:

  • Five-star ratings, as they are the best of breed.
  • Trailing dividend yields of at least 3%.
  • Price-to-book ratios no greater than 1.
  • Greater-than-20% drops in share price over the last 13 weeks. I'm looking for bargains, right?

Among others, that screen dug up these stocks, which have been shredded to such paltry levels that it's hard to keep ignoring 'em.

Take a look:

Company

13-Week 
Price Change

Dividend 
Yield

Price/Book Ratio

Price/Earnings 
Ratio (TTM)

AU Optronics (NYSE:AUO)

(43%)

8.7%

0.50

4.1

Dow Chemical (NYSE:DOW)

(44%)

8.8%

0.92

6.9

Gerdau (NYSE:GGB)

(50%)

5.4%

0.88

5.1

Ingersoll-Rand (NYSE:IR)

(49%)

4.4%

0.49

5.5

MVC Capital (NYSE:MVC)

(29%)

4.4%

0.63

4.0

Petro-Canada (NYSE:PCZ)

(41%)

3.1%

0.67

2.5

Tata Motors (NYSE:TTM)

(47%)

7.9%

0.66

5.0

Data from Motley Fool CAPS as of Dec. 25. TTM= trailing 12 months.

Looking at earnings in the rearview mirror typically means very little, but the disparity between what these companies earned in the past year compared to what they trade for today is pretty overwhelming. None of these are formal recommendations -- just a good starting point for you to dig a little deeper. Intrigued? You can rerun an update of this screen yourself, if you like.

Return of the Dow
Our CAPS community is pretty bullish on the Dow ... Dow Chemical, that is. You can pick apart a million things to not like about this company: deflating commodity prices, uncertainty of the pending Rohm & Haas merger, an economy hurtling toward a black hole ... you name it. Still, as hedge funds continue to deleverage and investors sell anything and everything to shore up their year-end books, bargain-hunting investors are looking at battered companies like Dow as an opportunity to buy when there's blood in the streets. As CAPS member Scorpioray noted earlier this month:

At $17-$20 per share, the share price is at its lowest in 35 years (we shouldn't see too much more downside).... dividend yield is historically high at over 8% .... and the 42 cent per share per quarter dividend is absolutely "risk-free" ... the CEO told us so .... more than once ! There will be a significant upside pop when the "cyclicals" index starts looking up ... but only for those willing to settle for the quarterly dividend until then.

A little more about that dividend: The $0.42-per-share per-quarter payout rewards investors with a nearly 9% annual yield -- the equivalent of winning the lotto these days.

The question is whether the company can keep it up, which is where I'm a bit less merry than some, CEO assurances notwithstanding. Last quarter's dividend payout sucked up all but $0.04 of its net income, and the current payout would consume roughly 85% of the company's 2009 earnings estimates -- not exactly a stupendous margin of safety.

That isn't to say this dividend isn't safe -- Dow's been a dividend darling for years and could very well just be bouncing in a cyclical trough. But at the rate the global economy has been imploding, the highs and lows of business cycles we've been accustomed to could become a wee fraction of the past. Factor in a fat pile of long-term debt, and things could get dicey for those relying on "risk-free" dividends going forward.

At any rate, the optimist in me still agrees: Dow Chemical looks awfully cheap at less than seven times earnings, and you're being paid handsomely -- at least for the time being -- to wait for a rebound. CAPS All-star jstegma laid it out succinctly last month, writing:

Nice dividend from a solid company that will be there when the recession, depression, armageddon or whatever it is ends. Buy, hold, and reinvest the dividends, and you're virtually guaranteed to beat the market.

Doesn't get much easier than that, eh?

Opportunity awaits
Let's face it: "unprecedented" is the word of the year. As the smoke clears and the dust settles from the Wall Street panic of 2008, incredible opportunities are popping up for long-term investors. Our CAPS community, where more than 125,000 investors share their thoughts and opinions, is a great place to get a slew of viewpoints on some of your favorite stocks. Care to share your thoughts? Click here to check out CAPS. It won't cost you a dime.

For further Foolishness:

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Tata Motors is a Motley Fool Global Gains recommendation. MVC Capital is a Motley Fool Hidden Gems selection. Dow Chemical is a Motley Fool Income Investor pick. The Fool owns shares of MVC Capital and has a disclosure policy.

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Stocks Mentioned

DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
AU Optronics Corp. Stock Quote
AU Optronics Corp.
AUO
$6.25 (-16.67%) $-1.25
Trane Technologies plc Stock Quote
Trane Technologies plc
TT
$155.99 (1.07%) $1.65
Tata Motors Stock Quote
Tata Motors
TTM
$29.59 (1.27%) $0.37
MVC Capital, Inc. Stock Quote
MVC Capital, Inc.
MVC
Gerdau S.A. Stock Quote
Gerdau S.A.
GGB
$4.89 (1.66%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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