Don't Miss This Cheap Stock

Cheap stocks can get cheaper. They often do.

Unfortunately, "cheap" is a relative term. Precious few stocks that trade for low price-to-earnings ratios or below book value are real bargains. They look enticing but are instead value traps -- stocks that deserve the multiples for which they trade, and punish the garbage-grabbers who buy them.

But don't take my word for it. Here are five "cheap" stocks that trapped bargain-hunting prey:

Sources: Motley Fool CAPS, Capital IQ, Yahoo! Finance.

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from professor Aswath Damodaran. In his book Investment Fables, Damodaran counsels investors to measure low price-to-book stocks by their returns on equity (ROE).

Makes sense to me. Book value is shorthand for equity. A low price-to-book stock is priced as if management won't produce high returns from the equity capital afforded it. Find a stock that defies this maxim -- a stock with an above-average and rising ROE -- and you may have found a bargain.

A machete for when you're in the weeds
Our 135,000-member-strong Motley Fool CAPS database is a great place to start your search. I ran a screen for well-respected stocks trading for less than twice book value, and whose returns on equity were 10% or more. Qualifiers were also trading no more than 25% above their 52-week low, leaving plenty of room for further gains.

Of the 11 stocks that CAPS found hiding in the weeds, CBIZ (NYSE:CBZ) intrigues me this week. The details:

Sources: CAPS, Yahoo! Finance.
Data current as of Aug. 17.

CBIZ is a business services firm that our CAPS investors like for its comprehensiveness, among other things. "CBIZ is a one-stop shop and partner for businesses of all sizes, non-profits and government entities across 140 offices in 36 states," wrote CAPS All-Star warbowl in February. "It provides direct services and/or brokerage services in accounting, tax advice, insurance, benefits, IT, finance and more."

But warbowl also likes the financials:

CBIZ has lots of cash, continues to buy up shares, as well as other companies to add to its bag of tricks. Seven straight years of 20% EPS growth from continuing operations, projected positive growth through the recession as employers look to CBIZ to help them control costs. Expect CBIZ to be a dependable stock for the long haul with lots of room to grow from its current small cap size — stick with it and you will be handsomely rewarded.

Agreed, if only because a tighter economy demands that non-essential corporate services be outsourced as cheaply as possible. This is a massive opportunity for CBIZ and peers such as Income Investor recommendation Automatic Data Processing (NYSE:ADP).

But that's also just my take. Would you buy shares of CBIZ at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

More bargain basement Foolishness:

• Take a look at our last litter of cheapskates.
• Here's how to find a double in three months.
• Don't make this bet. You'll lose.