5-Star Stocks Begging to Be Bought

"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? Despite the recent rally, there's no shortage of fear in many industries. It's a real gut check, but that fear is creating opportunities for investors patient and diligent enough to search for the babies thrown out with the bathwater.

We're looking for cheap stocks here. And not just stocks that have fallen in price, but good companies that are still cheap. There's a difference.

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

• Five-star ratings -- the highest our CAPS community offers.
• Estimates of profitability in the year ahead.
• High returns on equity.
• Attractive valuation based on forward earnings multiples.

Have a look:

Data from Motley Fool CAPS and Yahoo! Finance, as of Oct. 8, 2009.

None of these are necessarily recommendations -- just good starting points for you to dig a little deeper. You can rerun an update of this screen yourself, if you like.

A closer look at GrafTech International
In an instant, industries go from no-brainer to wealth-drainer.

That's what happened to the steel industry. From the summer of 2008 to early this year, steel companies like ArcelorMittal (NYSE:MT) and U.S. Steel (NYSE:X) went from all-time highs, to priced as if the world would never build again. Shares were just decimated, falling as much as 90% peak to trough.

Anyone see the documentary "Life After People?" That's what these companies were priced for. The end of everything.

But it was shortsighted fear, if not an all-out panic. Not only did the world not explode, but the same forces that destroyed these stocks to begin with -- a temporary cessation of global building -- set the stage for an inevitable rebound.

That's how markets work: Excessive optimism leads to oversupply. Panic quickly eliminates that oversupply, and then some. Lack of supply then plants the seeds of production, and hence recovery.

And after a brutal meltdown over the past year, here we are -- in the early stages of recovery. These cycles have repeated themselves over and over and over again throughout history. Like clockwork.

One of the best ways to exploit a rebound in the steel industry might not be direct exposure, but a company like GrafTech International. GrafTech makes specialty parts for steel mills, such as graphite electrodes. As steel mills start firing back up, so will GrafTech's earnings.

CAPS member goodalexander gave in July a thorough rundown of this company's strong points, writing:

Due to higher marginal utility of capital and population growth patterns, emerging markets will industrialize in the mid-to long run. Industrialization requires steel. Steel production takes place in Electric Arc Furnaces (EAFs) that must continually use great amounts of graphite electrodes to regulate heat and electric flow. These electrodes deplete and must be replaced. Graphtech has an 80 countrywide electrode distribution network, the expertise, and the productive capacity to dominate in growing markets. Using current spot prices for Graphite Electrodes combined with Graftech's annual manufacturing capacity of 220,000 metric tons, Graftech could feasibly double its 2008 revenue with no capacity constraints that would lower its 27% operating margins.

Better yet, goodalexander feels those favorable market conditions aren't yet reflected in the company's share price:

Graphtech will dominate multiple worst case scenarios: Trading at $12.22, down over $15 from its 52 week peak of $27.21 a share, Graftech is priced assuming that it will not capture new markets, and that durable demand will be permanently impaired. The belief that steel production will remain stagnant is extremely short-sighted because delayed capital overhauls and industrialization together must eventually cause steel production to surge above previous 8% annual growth levels. Graftech's international presence will allow it to supply the steel producers that profit from the inevitable industrial overhaul.

You take it from here
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