5 Top-Rated Value Stocks

Are you familiar with the dynamic duo of Fama and French? No, they didn't star in The Blues Brothers -- that was Belushi and Aykroyd.  Nor did they sing "Eres Tu" in Tommy Boy -- that was Farley and Spade.

While the names Eugene Fama and Kenneth French may not come up in most dinner conversations, the two have done some very interesting academic research on stocks. In short, they've proposed that there's more to stock returns than volatility -- which was most academics' previous consensus. In research they conducted over various periods and across multiple geographic locations, Fama and French determined that stocks characterized as "value stocks" have consistently outperformed non-value stocks.

Today, I've rounded up five value stocks that are all trading at less than two times their book value. To focus on high-quality stocks, I've cross-referenced these against ratings in our CAPS community of more than 120,000 investors.

Data from CAPS, Capital IQ, a division of Standard & Poor's, and Yahoo! Finance as of Dec. 12.

Five years ago, Vaalco Energy (NYSE:EGY) would have made this list with its 1.2 book value multiple. Since then, the stock has caught quite a tailwind; it's up more than 380% over that period.

While we can't expect that all of these candidates will perform like Vaalco, the CAPS community thinks that these are some good choices when it comes to value stocks. With that I mind, I thought I'd dig in a little further on Tesoro.

Where is the value?
If the black stuff that oil production companies pulled out of the ground was highly pure and unsullied by nasty byproducts like sulfur, refiners would be out of work. That's not the case, though. Just as diamond cutters make those stones twinkle, oil refiners turn the stuff from the ground into a substance that will efficiently power cars, trucks, and planes.

Refining oil on a large scale takes a lot of heavy equipment, so the primary value in refiners like Tesoro, Valero (NYSE:VLO), and Western Refining lies in the refineries that they own. Lately, though, there's been a fly in the refining ointment, causing many investors to pummel refiners' valuations. The refining industry got stuck when crude oil prices spiked, and the margin between the price at which they buy the unrefined stuff, and the price at which they sell the refined products, collapsed. The refiners hoped that if oil prices fell, gasoline prices wouldn't fall as fast, and the margin would then gain ground.

Well, crude prices have taken a dive, so are refiners raking it in now? As an old pal of mine from North Jersey might say, "no dice." Sure, refining margins have come back a bit, but they're still abnormally tight, and investors don't seem convinced that volatile oil prices will give refiners much breathing room.

CAPS players, however, think that the low valuations on refiners are a good opportunity to get in for the long term. When it comes to Tesoro, more than 900 CAPS members have given the thumbs-up on the stock, versus just 60 who think it will lag the broader market. Last month, CAPS All-Star Alwayzwrong joined the bullish Tesoro chorus, saying:

I am well aware that this pick will turn negative in the short-term, but I am making it nonetheless, because the refiners have--without intention--colluded to cut production. It is the only prudent thing to do. All are hoarding money, mainly through cutting capex, to sustain themselves in such a difficult economic climate. The supply side of gasoline is starting to show signs of strain, because we are near a point where increasingly low gasoline prices cannot be sustained. We are faced with either of two outcomes, shortages driving the price up, or an (exogenous) increase in gasoline prices, or crude. Supply erosion is more likely at this point than continued demand destruction.

So what do you think? Are the stocks in this group values, or value traps? Log onto CAPS and let the rest of the 120,000 member community know what you think.

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