Color to the Numbers: Top Mid-Cap Value Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments and not core operations, or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for mid-cap value stocks to see which stocks may be worth investigating further and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for mid-cap value investments. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. There are even pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our mid-cap value screen for today and a handful of the top stock candidates it returned. We'll run a pretty simple screen using the following criteria:

• Market cap between $1 billion and $10 billion.
• A debt to equity ration of less than 0.5.
• Free cash flow of at least $100 million.
• Projected five-year earnings growth rate of at least 15%.
• A forward P/E of less than 15.

This should give us the cream of the crop in terms of companies on a solid foundation with decent expectations for earnings growth. The debt-to-equity ratio and free cash flow hurdle will clear out companies that are more leveraged and aren't generating a significant level of free cash. The earnings growth and forward P/E criteria combine to give us a forward-looking PEG ratio (the forward P/E divided by the estimated growth) of less than 1 and will help sift out only those stocks trading at a reasonable value. But the PEG alone doesn't dictate the value of a company or make it a good investment. (Hint: This is where CAPS can really help.)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Showing once again that anything related to oil is golden these days, Ensco gets high ratings from the CAPS community. The offshore driller contracts its exploration, drilling, and production services to governments and oil and gas companies around the world. Revenues have grown at greater than a 30% clip over the last several years at Ensco, and analysts forecast a 28% earnings growth rate going forward. Also, with the recent marriage of drilling giants Transocean and GlobalSantaFe, many investors now see a likelihood of further consolidation in the segment. Add these to a low valuation on Ensco, and you have a recipe for optimism from CAPS investors, where 345 of the 354 investors rating the stock have given bullish votes.

A blast from the dot-com past that's regaining some favor these days is storage area network (SAN) specialist Brocade Communications. The company has turned the corner recently, and organic growth, as well as growth through acquisitions, has given investors renewed interest in the company. All is not stellar with Brocade, though -- with questions about managements' involvement in options backdating and uncertainties about the benefits of some mergers, Brocade has its share of naysayers. That helps keep the stock depressed and leaves it stocked in the fishing hole for value investors. Of the 39 CAPS All-Stars weighing in on the debate, 43 believe the company has the right stuff to beat the S&P going forward.

Included on our value screen this week is at least one stock that the CAPS community is collectively voting to stay away from -- Herbalife. The nutritional products company has more than 50% of its CAPS investors giving the stock the thumbs down, and the percentage jumps to 72% if you look at just All-Star opinions. The discontent woven into Herbalife has a lot to do with the network marketing aspect of its business, which many investors consider an outright scam. Some solid fundamentals and new growth opportunities in China don't seem to be enough to change the minds of many investors, either.

Let 60,000 investors be the judge
It's always difficult to tell just where opportunities may lie with beaten-down stocks, especially when just "running the numbers." Thankfully, the collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.

The Motley Fool Inside Value team searches 24/7 for great value stocks trading at bargain prices. Take a peek at the companies that lead analyst Philip Durell thinks are trading below intrinsic value today with a free 30-day trial.

Fool contributor Dave Mock does his best to color within the lines, but he reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.