5 Top-Rated Value Stocks

Are you familiar with the dynamic duo of Fama and French? No, they didn't star in Tommy Boy -- that was Farley and Spade. And they didn't perform "Who's on First?" -- that was Abbott and Costello.

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 -- contrary to most academics' previous consensus. In research they conducted over various periods and across multiple geographic locations, Fama and French determined that equities 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. (You can run the same screen on the CAPS screener.) To focus on high-quality stocks, I've cross-referenced these against ratings in our CAPS community of more than 130,000 investors.

Data from CAPS, Capital IQ, a division of Standard & Poor's, and Yahoo! Finance as of May 22.

While these aren't formal recommendations, 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 Valero Energy.

Where is the value?
Though light, sweet crude oil has been used as a fuel in its unrefined state, the black goop that oil companies pull out of the ground typically won't do you much good. In its unrefined state, it's often full of adulterants, and it can also be explosive -- a big problem, unless you have an unhealthy obsession with pyrotechnics.

That's where massive refinery plants like the ones that Valero owns come into play. These giant complexes take raw oil turn it into useful products like gasoline, jet fuel, motor oil, and asphalt. One of the principal components of Valero's value is its billions of dollars of equipment, all of which adds value to crude oil.

Valero has an additional edge, though. While nearly all refineries handle light, sweet crude -- the purest form of crude, and the easiest to refine -- Valero can take on significant amounts of sour crude, a less desirable raw product that requires a somewhat different refining process. This means Valero can purchase sour feedstocks at lower cost, and make a higher margin on the end products it pumps out.

But will it beat the market?
A key factor in Valero's future is whether the world will continue to use refined oil products at the same high rate that it currently does. While there are definitely efforts to find alternatives to fossil fuels, it seems less than likely that we'll see a large-scale changeover any time soon. Consider that a big notch in Valero's win column.

The company's ability to use sour crude should also remain a boon, since the supply of light, sweet crude may dwindle faster than "disadvantaged" crudes.

And with a massive footprint already established in North America and the Caribbean, the company may have its sights set on expanding abroad. Just recently, it agreed to purchase a 45% ownership of a Dutch refinery from Dow Chemical (NYSE:DOW); it will work alongside Total (NYSE:TOT), which owns the other 55%.

While I added an outperform pick on Valero to my CAPS portfolio last summer, I'm far from the only CAPS member with a positive outlook on the stock. In fact, of 4,380 CAPS members who've weighed in, more than 4,200 have given the stock a thumbs-up.

CAPS All-Star TSIF joined the bullish crowd in late April:

A very refined energy player. Continuous improvement in their refineries keeps them in-line and ahead of stricter energy demands from states such as California. Valero Energy has one of the best refining capacities spread out in key locations, (some of which are fairly hurricane proof). In addition their side products such as asphalt and petrochemicals should be a good stimulus play. With 5,800 retail outlets they can be partially shielded from some of the price volatility. Low P/E, decent cash flow, well below their $30 book value. Wrote off $4B in goodwill (all of it) so on paper things look worse than they really are.

So what do you think? Are the stocks in this group values, or value traps? Log onto CAPS and let the rest of the 130,000 member community know what you think.

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