Cheap stocks can get cheaper. They often do.

Unfortunately, "cheap" is a relative term. Precious few stocks that trade for low price-to-earnings ratios or below book value are real bargains. They look enticing but are instead value traps -- stocks that deserve the multiples for which they trade, and punish the garbage-grabbers who buy them.

But don't take my word for it. Here are five "cheap" stocks that trapped bargain-hunting prey:


CAPS Stars
(out of 5)

2004 Price-to-Book

Return Since

R.R. Donnelley & Sons (NYSE:RRD)




American Capital (NASDAQ:ACAS)




International Rectifier (NYSE:IRF)








Blockbuster (NYSE:BBI)




Sources: Motley Fool CAPS, Capital IQ, Yahoo! Finance.

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from professor Aswath Damodaran. In his book Investment Fables, Damodaran counsels investors to measure low price-to-book stocks by their returns on equity (ROE).

Makes sense to me. Book value is shorthand for equity. A low price-to-book stock is priced as if management won't produce high returns from the equity capital afforded it. Find a stock that defies this maxim -- a stock with an above-average and rising ROE -- and you may have found a bargain.

A machete for when you're in the weeds
Our 140,000-member-strong Motley Fool CAPS database is a great place to start your search. I ran a screen for well-respected stocks trading for less than twice book value, and whose returns on equity were 10% or more. Qualifiers were also trading no more than 25% above their 52-week low, leaving plenty of room for further gains.

Of the 16 stocks that CAPS found hiding in the weeds, convenience store operator The Pantry (NASDAQ:PTRY) intrigues me this week. The details:


The Pantry

Recent price


CAPS stars (5 max)


Total ratings


Percent bulls


Percent bears






% Above 52-week low


Sources: CAPS, Yahoo! Finance. Data current as of Sept. 18.

The thesis for The Pantry isn't much different from that for rival Casey's General Stores (NASDAQ:CASY). Fools who like Casey's like it because its gas and grocery convenience stores are often the primary (and sometimes only) options for small-town U.S. residents.

"Earnings projections are on the way back up, and this stock is far below the P/E of its industry peers," wrote CAPS investor physicsisphun in June. "On the next one or two earnings cycles, I think it will bounce quite significantly."

A $0.45-per-share earnings miss in its last quarterly report has held this stock in check, but at five times earnings, it now trades as if growth won't return. I wouldn't bet on that.

But that's also just my take. Would you buy shares of The Pantry at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

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Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is a bargain at any price.