You need to protect your portfolio during tough markets. Stocks that incorporate a margin of safety (bought below their intrinsic values) are more likely to hold ground during a market downturn, and very likely to show strong gains over time. Indeed, buying value-priced and smaller-cap stocks may be the best way for individual investors to consistently outperform institutional investors and the broader market. And we've laid out some ways you can guesstimate a company's intrinsic value and determine the potential margin of safety.

We know that value stocks are great, we know that they're one of the few places where an individual has a market-beating advantage over institutional investors, and we know how to tell whether a value candidate really has a margin of safety. There's just one thing we don't know: Where do we find these stocks?

Even if we limit ourselves to U.S. stocks with market caps over $50 million, we're still talking about thousands of stocks ... and we need to find a dozen or so, possibly obscure names in that pile. How do we do it?

Screen test
The most commonly used approach is to employ a stock screener, a simple search tool that finds stocks that meet certain criteria. Here at the Fool, our Motley Fool CAPS service has a useful stock screener that includes both fundamental characteristics of stocks, as well as what our CAPS community of investors thinks about their future prospects.

Of course, a screener isn't of much use unless you know what to tell it to look for. While it will take some experimentation to get good results out of any given screener, I suggest you start by setting it to look for smaller-cap stocks (under $2 billion or so) with low price-to-earnings ratios, healthy growth projections, and strong margins. Using those criteria, here are some of the stocks that made the list:

Stock

P/E

5-Year Projected
Future Earnings Growth

Net Profit Margin

Marvel Entertainment (NYSE:MVL)

9.3

15.9%

30.4%

American Oriental Bioengineering (NYSE:AOB)

6.4

15.5%

18.1%

Ceradyne (NASDAQ:CRDN)

4.6

11.0%

15.7%

Sohu.com (NASDAQ:SOHU)

10.1

46.7%

37.0%

Tidewater (NYSE:TDW)

5.2

57.0%

27.7%

Walter Industries (NYSE:WLT)

3.9

86.0%

23.6%

Gigamedia (NASDAQ:GIGM)

7.7

21.5%

22.9%

Source: Yahoo! Finance, Motley Fool CAPS.

These aren't recommendations by themselves, of course, but they do look like promising candidates for further research.

Donning your CAPS
That's not all CAPS can do for you. You can also see what particular members of the service have to say about each of the most promising candidates. Simply hop over to the site, enter the ticker, and click to get lots of info on the stock.

Spending a few minutes on a stock's CAPS page -- and following the links to stories about the stock -- can give you an idea of recent developments and key issues facing the company, which are great places to start your research.

If all this sounds like more time and effort than you can afford to spend, you can also get some help. Our Motley Fool Inside Value newsletter analyzes a host of value stocks, looking for the best margins of safety and making brand-new stock recommendations in each month's issue. Inside, you'll find ideas backed by in-depth research, easy-to-understand summaries, a great members-only discussion board, and a track record that is beating the market since the service's inception. You can see Inside Value free for 30 days. Access to all past issues is included and there is no obligation to subscribe.

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This article, written by John Rosevear, was originally published on June 19, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. American Oriental Bioengineering and GigaMedia are Motley Fool Global Gains recommendations. American Oriental Bioengineering is also a Motley Fool Hidden Gems recommendation. Ceradyne, GigaMedia, and Sohu.com are Motley Fool Rule Breakers selections. Marvel Entertainment is a Motley Fool Stock Advisor selection. The Fool owns shares of American Oriental Bioengineering. Try any of our Foolish newsletters today, free for 30 days.The Motley Fool has a disclosure policy.