5-Star Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the local flea market, or the neighborhood car dealership, people inherently understand the benefits of getting a great deal.

Yet, despite this infatuation with bargain opportunities, it doesn't occur to many investors that buying cheap stocks is possibly the best way to squeeze a whole lot of bang out of a hard-earned buck.

As legendary investor Christopher H. Browne writes in The Little Book of Value Investing, we should always attempt to "buy stocks like steaks ... on sale."

Our penny-pinching process
So, with the help of our community over at Motley Fool CAPS, I'll once again try to find some cheap stocks for all of my kindred stingy spirits.

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.

Dive in the bargain bin
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 cheap stocks:

As usual, our bargain bin isn't exactly brimming with exciting, or even well-recognized, names. But that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's biggest returns.

Here's a quick summary of one particularly unknown stock in the bin, as well as what some of our CAPS players think about it. The bullish arguments might just be enough to point you in the "rite" direction.

Shop cheap and you shall ShopRite
Here at the Fool, we talk a lot about promising stocks that Wall Street ignores, but Village Super Market, which operates a chain of 23 ShopRite grocery stores, is about as unloved as it gets. No professional analysts cover the New Jersey-based company, despite sales in excess of $1 billion.

Although you can learn about the ShopRite stores and dance to a catchy ditty at ShopRite.com, Village Super Market itself has no website, no glossy annual reports, and, from what I gather, no investor relations department, either. What you see in the SEC filings is what you get (and it's all you're going to get).

It's always tough to tell for certain, but I think the lack of coverage Village receives is the primary reason we find it at the bottom of this week's bargain bin. How else do you explain such relatively low price multiples for a company that has grown earnings per share more than 20% for the last 10 years and has boosted its top line in each of those years?

Also, Village Super Market has a long history of free cash flow production. In recent years, management has used it to pay shareholders a healthy -- and increasing -- dividend. Village generated $35.5 million of operating cash flow in fiscal 2006, and at current prices, the dividend yield stands at a modest 1.50%.

If it looks as though management is acting in the best interests of its shareholders, there's a good reason for that: Since 1937, the business has been run by the Sumas family, who continue to "eat their own cooking" as major stakeholders. Founder and President Perry Sumas owns about 16% of Value Super Market, while his nephew, Chairman and CEO James Sumas, owns approximately 8% of the company.

Taken all together, Village Super Market looks like an above-average opportunity. As the supermarket industry continues to consolidate, an underfollowed, financially solid, and well-run dividend payer such as Village seems like a decent bet to capitalize on attractive opportunities.

Here is small excerpt from a wonderful analysis written by CAPS all-star pencils2 (you can read the rest of the synopsis by clicking here):

"A very interesting grocery business. No analysts following the stock, a very strong balance sheet, improving margins, improving ROA and ROE, the business is producing a steadily increasing amount of cash flow, and the bank has been unnecessary to fuel growth ... This is a very stable company, has great and improving financials, a low P/E, an incredibly experienced management team and business, and it still hasn't been found by Wall Street."

A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation; we want only to generate some possible ideas that you might find worth further research. If you'd like to scour the bargain bin for yourself, 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 time when I'll highlight another bunch of cheap stocks from CAPS. Until then, keep your portfolios brimming with bargains.

For more cheap-ish CAPS content:

• 7 Highly Rated Stocks on Sale
• 7 Growth Stocks on Sale
• Get Ready for the Bounce

You can check out any of the Fool's newsletters with a 30-day free trial.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool has a disclosure policy.