The Costanza Principle

Not only does art imitate life. It often imitates investing. Consider celebrity slacker George Costanza, brought to life by actor Jason Alexander in the hit series Seinfeld. This balding, lying, scheming, cheapskate of a little man strikes me as a superior value investor. Follow along, please.

The courage to do opposite
Last time I spilled digital ink discussing the investing wisdom of George Costanza, it was to point out that his propensity to do opposite stands out as remarkably Rule Breaking. That's still true. Yet I should also point out that you can also be a Rule Breaking value investor. You just need to be ridiculously cheap and willing to do what others avoid at all costs. Sound familiar, Seinfeld fans?

That's a perfectly good eclair!
Consider this exchange from episode 92, "The Gymnast." The scene has George telling Jerry how he was caught eating an eclair discarded by his girlfriend's mother. Jerry, naturally, is baffled.

Jerry: "So let me get this straight. You find yourself in the kitchen, you see an eclair in the receptacle, and you think to yourself: 'What the hell, I'll just eat some trash.'"

George: "No, no, no, no, no. It was not trash."

Jerry: "Was it in the trash?"

George: "Yes."

Jerry: "Then it was trash."

George: "It wasn't down in. It was sort of on top."

Jerry: "But it was in the cylinder."

George: "Above the rim."

Jerry: "Adjacent to refuse is ... refuse."

Jerry has a point if we're talking about food. But what if we're talking about stocks? In that case, I'm not so sure.

You want me to buy what?!
Not long ago, I offered an analysis of United Online (NASDAQ:UNTD), a company whose primary business has been dial-up Internet service. With broadband Web access on the march across the country and the globe, you'd think this would be one stinker of a stock. And you'd be right -- sort of.

Certainly Wall Street has tossed the company aside like so much garbage. Just take a look at this chart and you'll see what I mean. Not that analysts have lacked reasons to be down on the stock. Earnings aren't growing; they're contracting. That was true even in the most recent quarter, which was a good one by most accounts. Part of the problem was higher taxes. But larger operating expenses didn't help, either. Indeed, operating margin was down more than two full percentage points.

Yet United Online is exactly the kind of trash that might entice the Costanza in you. First, United Online pays a meaty 6.3% dividend that is fully funded through cash flow. Second, free cash flow (FCF) remains substantial. Fellow Fool Nathan Parmelee calculated it at more than $32 million in the latest quarter. I'm not so generous; my estimate comes in at $25.5 million. (That's after expensing stock-based compensation.) Take that out for a full year and that brings estimated FCF to $102 million.

A little extra research shows there were 61.76 million shares outstanding as of the latest quarter. That, plus our cash-flow estimate, makes it possible to calculate an intrinsic value for United Online shares. It's a pretty quick process, actually -- thanks to the discounted cash flow calculator available to Motley Fool Inside Value subscribers (click here for a free trial). Here are the main inputs:

• A 15% discount rate to account for the vulnerability of United Online's business.
• $102.064 million in free cash flow.
• 61.76 million in shares outstanding.

Finally, we enter the current share price -- $12.77 as of this writing -- and assumed growth rates for the next five years, the next five after that, and ongoing. Check out the results:

If we assume that analysts are right and the company can maintain 10% bottom-line growth for the next five years, then United Online could be a buy. Not all that unlike finding a tasty chocolate eclair atop a heap of trash, is it?

Try a trash bin near you
Of course, George didn't have to dig to find his treat. It was right there in front of his face. The rest of us aren't usually that lucky in our investing. We'll have to dig through the stock market's refuse ourselves.

If you'd rather stay clean, hire a garbage man instead. Philip Durell, chief analyst for Inside Value, is happy to do the dumpster-diving for you. All you need to do is take a risk-free trial today and you'll see why Philip's bets on Intuit (NASDAQ:INTU) and Home Depot (NYSE:HD) have helped him best the market by more than six percentage points as of this writing. More importantly, he'll give you access to all the tools you need to teach yourself the science of value investing, including a watch list of potential value stocks that includes, among others, ConocoPhillips (NYSE:COP) and Cadbury Schweppes (NYSE:CSG).

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Look, we know the stock market's eclairs are tempting. So go ahead and take a bite of as many of them as you'd like. Your wallet might get a whole lot fatter as result.

Fool contributor Tim Beyers will take jelly doughnuts over chocolate eclairs seven days a week and twice on Sunday. Or three times, depending on how hungry he is. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.