5-Star Stocks in the Bargain Bin

Everyone loves a bargain. Be it at the grocery store, the local flea market, or at 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: We'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. We'll use 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 into 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's this week's bargain bin:  

As usual, our list 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.

Score with Thor
You don't need to be a stock genius to sense the most scintillating investment trends. Even the most casual investors know that the baby boomer demographic -- now a third of the U.S. population -- represents an enormous opportunity for wealth-building gains. There are countless ways to go for the boomer "bonanza," but Thor Industries, the world's largest manufacturer of recreational vehicles, is among our CAPS community's favorites.

When you take a quick look at Thor's financials, it's easy to understand why 49 of the 52 CAPS All-Stars who've rated Thor are bulls. For the past five years, Thor's sales have more than tripled, earnings per share have grown at a compound annual growth rate of 40%, and returns on equity have consistently hovered in the 20% range. In 2006 -- a year marked by softness in the recreational vehicle space -- Thor actually increased its share of the RV market against competitors like Winnebago and Fleetwood. So, when you combine strong historical performance with the notion that baby boomers should ramp up leisure spending as they retire, you've got a reasonable investment case to build on.  

Of course, Thor probably wouldn't be in our bargain bin if the entire picture were so rosy. Although the road looks smooth in the distance, higher gas prices and weak housing in general are starting to make the ride bumpy in the short term. In May, Thor reported an 8% drop in sales, along with a backlog that came in 15% lower than the previous year -- suggesting that, for now at least, the boomers are holding off on the open-road fun. Thor's stock has also felt some short-term pressure, trading at the same level it did at the beginning of the year. However, for Fools patient enough to wait out a lackluster RV market, there are still plenty of reasons to like Thor at the current price.

Thor has a long history of using its free cash flow for the benefit of shareholders -- be it through a growing dividend (now yielding 0.60%) or healthy share repurchases. That should be no surprise, because the biggest shareholder, Wade Thompson, is also Thor's chairman and CEO. Throw in a no-debt balance sheet and our bargain-bin price, and Thor looks like a pretty decent way to bet on more favorable conditions down the road.

Here are three CAPS players who couldn't wait to go RVing:

• Fellow Fool and CAPS All-Star TMFKopp likes Thor's all-around investment characteristics and says, "Well-run company in a stable industry. Looks to be outdoing its competitors on most operating metrics, and trades at a discount. I also like the potential growth scenario coming from demographic trends."
• CAPS All-Star TheGarcipian agrees and believes Thor's stock has plenty of miles left in it: "As boomers continue to retire in drove numbers, this stock will continue to move upwards. Gasoline prices have never really affected Americans' desire for the open road, nor will they ever tame our infatuation to freely drive anywhere."
• Finally, Patrick6k lets us know why frugal Fools should get behind the wheel: "This producer and seller of recreational vehicles has all the ingredients a value investor loves. It has a large share of inside ownership, gobs of cash on hand, no debt, a nice little dividend to help increase your shares during the dips in share price, and cash flow aplenty."

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.

Oh, and it's totally free -- an offer that even the deepest of value investors should never pass up.

For more cheap Foolery:

• 5 Low-Priced, High-Star Stocks
• Get Ready for the Bounce
• 7 Highly Rated Stocks on Sale

Check out six of Tom Gardner's investment ideas for the future in his Fortune article, "6 Supertrends and 6 Superstocks."

Not convinced about the power of cheap picks? Fool contributor Brian Pacampara has been tracking the stocks used in this column. TheFrugals are ranked 49 out of 30,600 rated portfolios. You can check it out here. Brian owns no position in any of the stocks mentioned. The Fool's disclosure policy always pays the full price for transparency.