4 From the Dumpster

If you've ever gone diving through trash receptacles (and I have, from time to time), you know the agony and the ecstasy. Mostly agony, to be honest. The majority of the stuff that ends up in the dustbin deserves to be there. But once in a while, you find it: that beautiful brass lamp that needs only a $5 rewiring job, a Honus Wagner rookie card, maybe one of those upside-down biplane stamps.

For me, the investing equivalent of the trash bin is the 52-week-low list. I scan it at least once a week, looking through the Street's trash in order to see if there's anything there worth polishing up and taking home. Normally, the low list is too much like the dumpster; a lot of what's there is slimy, smelly, and deserves to fester. But often, there are some good ideas for further exploration.

There's a reason a lot of us in the Motley Fool Inside Value family look for investment ideas on the 52-week-low list. Academic studies indicate that the market often overreacts to bad news, meaning that some of the items on the low list may be discounted too much -- or may be on their way to that stage. Of course, some of history's most famous investors, like Warren Buffett, have made some of their biggest scores on stocks that showed up on the recent loser list. The key is to find companies that aren't broken, but are simply misunderstood and maligned.

That's why I usually narrow my focus on the low list to companies with solid, recognizable brand names and well-established business models. In other words, companies that are in little danger of disappearing completely. Over the past few weeks, the following well-known names caught my eye.

Eastman Kodak, perhaps the best-known name on this list, has so many troubles, I wonder if it will ever turn around. I've already discussed -- several times -- why I don't think it's a good buy, so this one goes back to the scrap heap. Travelzoo is a daytraders' plaything, and despite the fact that it's a profitable business, it would need to drop a whole lot more before it looked like a value to me. Ruby Tuesday and Family Dollar fit firmly into my "so what?" bin, meaning that though they're running well enough, and may look cheapish, I don't see much that's unique or especially compelling about their businesses. That leaves only four prospective bargains in my basket.

DHB: Protection for everyone but shareholders
Everyone likes the body armor biz, right? Contracts with our military, a product anyone could love, and now trading at a substantial discount to last year's price. What could possibly be wrong? In a word, everything.

The formerly high-flying body armor maker (and, alas, Motley Fool Stocks 2004 pick) is reeling from recent controversy over vests using Zylon fiber, which reportedly loses a lot of its projectile-stopping potency as it ages and breaks down. In April, DHB's accounting firm decided not to come back, after having served a mere year and a half in the position following the 2003 resignation of Grant Thornton. I firmly believe that these problems wouldn't keep DHB down forever. But there are more worrisome things to consider.

DHB's main problem is up in the executive suite. Namesake CEO David Brooks and other bigwigs cashed out tens of millions of dollars' worth of stock options last year when the company traded in the high teens and low 20s. If you want a barometer of how substantial this was, consider that Brooks' personal take from options exercises alone in the last fiscal year was $70 million. The company achieved net income of $76.7 million total over the previous five years -- and lost $32 million the year before that.

Now that this company has cratered to one-fourth its former high price, I don't see any insider buying. Instead, I see insiders granting themselves a giant pile of warrants, including a ludicrous 1.5 million to Brooks at a $1 strike price, vesting immediately -- with another 750,000 vesting each year until 2010. Unless the board changes its mind and vests them earlier. Mix in overly generous housing and personal benefits and a slew of creepy related-part transactions that enrich family members, and you can only come to the conclusion that Brooks believes that what's his is his, and what's yours is his too.

My advice: Leave this one to marinate in garbage juice, because that's exactly where Brooks will leave you if he gets the chance.

Fannie Mae: Other people's money
Fannie Mae is already an Inside Value pick, and if you believe that it will emerge from its current difficulties intact, it's an even better bargain than it was initially, having dropped 30% from then. (Can't win them all. We know that.) Many will share our value guru Philip Durell's opinion: The current share price adequately bakes in the possibilities of slower growth and major downward revisions in the restated financials.

But this is one of those stocks where I have to disagree with my sage colleague. I don't like the shares at all. I think Fannie is simply too complex for most investors to closely monitor. Honestly, I wouldn't want to. You ever read their filings? Ouch.

Then there are risks of further regulatory action. What happens if the housing market actually does cool, hiss, or pop? How will that come down on Fannie's finances? Will it make Fannie a more attractive scapegoat for legislators and bureaucrats looking to score points with waves of angry constituents? I honestly don't know, and I doubt that anyone does. Fannie may indeed be a value, but, like that incredible deal on five pounds of nutmeg at Sam's Club, this is one apparent bargain I'm happy to live without.

Wal-Mart: So much for the smiley face
Speaking of Sam's Club, Wal-Mart's troubles are pretty easy to spot: a top line that's not exactly sluggish, but clearly disappointing the Street, and a bottom line to match. (The latest numbers are here.) Let's just say no one seems to want to pay up for 10% revenue growth and 8% EPS growth from the world's biggest retailer. But there are reasons you may want to do what others won't. Chief among them are returns. With a current return on equity of 23.6% and a current return on capital of 13.7%, Wal-Mart has a long history of producing stable rewards for shareholders.

And, as I've pointed out in the past, sales malaise is not an unprecedented phenomenon for Wal-Mart. True, robust expansion keeps the free cash flow low, but until the firm starts to see diminishing returns on that expansion, there's little argument to rein it in. When a premium brand on such firm financial footing is trading at a multi-year discount like this -- measured by P/E, the enterprise value-to-revenue ratio, or anything else -- it's really tough for a cheapskate like me not to buy.

TJX: More trouble in the bargain aisle
If you're into free cash flow, you'll usually find more to like at TJX. Indeed, that's one of the prime reasons my colleague Nate Parmelee has been more or less enthused about this company, including making it his Monster Stocks pick. But the Street has been less willing to give the firm a Mulligan. Recent sales make Wal-Mart's sleepy growth look supercharged. The top line inched up just 7% last quarter, though the bottom line grew 9%.

By P/E and other common valuation metrics, TJX has been cheaper in the past, but not very often. Although its returns on assets, capital, and equity have drifted downward since five years ago, they're still quite robust, with the leverage-aided return on equity around 43% and a return on capital of 27.4%. Those kind of numbers indicate a long-term winner, and when consistent winners get cheaper than usual, it's time to think about buying.

Foolish bottom line
Value investing is as much about patience and predictability as anything else. Over my investing career, steady, consistent companies -- as measured by their historical ability to deliver free cash flow and good returns on capital -- have always done better for me than any of my bets on the next big thing.

If you can't reliably measure it -- or don't want to take the time (Fannie) -- then you should take a pass. When in doubt, just stay out. If management takes the cream and leaves nothing for you (DHB), well, you're just helping one more multimillionaire make his yacht payment.

As unexciting as it is, sometimes the best values around are those big, boring behemoths that no one else wants. History has shown that Wal-Mart and TJX know how to deliver for shareholders, yet they're trading hands at hefty discounts to their historical selves. Given the low risk in these two stocks, value investors ought to set their sights on these shares. You don't often get exceptional businesses at good prices, or good businesses at exceptional prices. When you find them -- as we try every month at Inside Value -- take advantage.

If you'd like to see why Fools think both Wal-Mart and TJX are monster blue chips for the next decade, you can score our special report free, and get $50 off a membership to Motley Fool Inside Value, all by clickinghere.

For related Foolishness:

• Kodak is fading fast.
• Is TJX off game?
• Wal-Mart has had gas pains before. What's next?
• DHB has been less than bulletproof.

Seth Jayson is considering adding some more boring retailers to his portfolio, but at the time of publication, he had positions in no company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.