5 Frugal 5-Star Stocks

Buying stocks for significantly less than intrinsic value is the method that investors such as Bill Miller, Michael Price, Seth Klarman, and Warren Buffett have used in establishing their legendary status.

Of course, the tricky part of this approach is being able to tell the difference between authentic value and a value trap -- something that the aforementioned masters have, well, mastered!

Our penny-pinching process
So in that spirit, and with the help of our community over at Motley Fool CAPS, I'll once again be looking to separate the value wheat from the worthless chaff. The approach is far from complicated: I'll run a simple screen for five-star stocks (the highest rating a stock can get in CAPS) that have enterprise value-to-EBITDA (EV/EBITDA) multiples below 10. I'll be using EV/EBITDA rather than the more common price-to-earnings ratio, so that we can account for differences in each company's capital structure.

In other words, you won't be finding high-profile, high-multiple growth stories like Research In Motion and Apple as part of the Frugal Five anytime soon.

Meet the Frugals
Instead, by running this screen, we'll zero in on statistically cheap stocks that, according to our CAPS community, have plenty of great reasons to trade at much higher levels. So without further ado, here is this week's list of Frugal Five-Stars:

As always, our family of Frugals is dominated by relatively unknown companies domiciled in some sector snoozers. This week's list comprises a business-form printer, a carbon manufacturer, an energy services company, a distributor of metal products, and a provider of construction services, respectively.

Not exactly the wildest bunch of businesses, are they?

That's OK. Here's a quick summary of one particularly interesting Frugal -- Building Materials Holding -- as well as what some of our CAPS players are saying about it. Some of the bullish arguments might just keep you from dozing off.

Constructing a bargain
Since it's one of the nation's largest construction-service companies, it should come as no surprise that Building Materials' financials have been hurt by the recent slowdown in the housing market. The company's latest earnings release showed a 15% drop in net income, while revenues were up a paltry 1% from the previous year. Unfortunately for investors, the stock has reflected the operating weakness: Shares are down nearly 40% from their 52-week highs, even after a recent surge this past January. However, many value-conscious players in CAPS believe that the company represents a tremendous turnaround opportunity. And they might just have a point.

Despite the company's most recent quarter, Building Materials has shown the ability to post profit margins and returns on equity well above the industry average. For the past three years, for example, returns on equity have averaged an impressive 25%. Yet, with an EV/EBITDA of less than 4 and a P/E of less than 6, Building Materials' stock continues to trade at a significant discount to its less profitable peers like Bluelinx (NYSE:BXC).

In addition to respectable profitability, Building Materials' historic rate of growth has also been solid -- revenues have grown at a compounded rate of 27% during the last five years, while EPS has risen at an average rate of 45% during the same period. In fact, the firm was No. 41 on Fortune magazine's 2006 list of fast-growing companies. Of course, as Warren Buffett likes to say, the investor of today doesn't profit from yesterday's growth. But with a PEG ratio of 0.44, Building Materials' shares look cheap relative to its expected rate of growth, as well.

Materially significant
So when you consider the company's history of decent profitability, impressive growth, and seemingly attractive price multiples, Building Materials may prove to be a smart turnaround bet -- with a built-in margin of safety against continued weakness in the housing industry, to boot.

But don't just take my word for it. CAPS player ISPYVALUE, for example, builds upon the analysis:

"This building supplier has been beat up lately due the slowing of activities in the housing market. I think this company will perform well over the long haul because eventually the downturn in housing will correct itself and continue at a more steady pace ... This company has proven to rake in the cash in active building time and you will see its stock spike up to recent highs again within the next few years."

A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation; we only want to generate some possible ideas that you might find worth further research. If you'd like to search for Frugals of your own, read what our CAPS community thinks, or even chime in with your own opinions, click here to get in the game.

That's all for this week, Fools. Be sure to join me next week when I'll highlight another batch of cheap stocks for your perusal. Until then, Frugal on!

Fool contributor Brian Pacampara holds no position in any of the companies mentioned. AGL Resources is a Motley Fool Income Investor choice. The Fool's disclosure policy always seeks to pay the right price.