Uncover the Market's Best Bargains

Quick question: What's the best way to make a fortune in stocks?

Umm ... start with an even larger fortune?

Try again, funny guy. Though I'll warn you, there isn't one right answer.

OK, I'll bite. The best way to make a fortune in stocks is to own some.

Really going out on a limb there, aren't you?

I dunno, after last year's crash, it seems like maybe there's an argument the other way, y'know?

And the market is up how much since March?

A lot. But it seems like a lot of the stocks that are up are chowderhead stocks, things that are getting ahead of themselves. I mean, dude, look at Ford (NYSE:F) --

Hey, I own and like Ford, though I do agree that it's kind of optimistically priced at the moment. Of course, we could make the same argument about Amazon.com (NASDAQ:AMZN) or Goldman Sachs (NYSE:GS) or a whole bunch of others. Lots of valuations are high at the moment. But that doesn't mean there aren't great investments out there.

Yeah, but how do we find them?

Well, think about it. We're looking for good companies at attractive prices, right? What makes a good company? I'd say that many things go into it, but we can quantify a couple. For instance, we want companies with low debt that are generating a good return on their invested capital. That's just two numbers, but together they give us a peek into the company's debt load, profitability, and the effectiveness of its management.

That would be a start. But again, where do we look?

Have you tried the Fool's CAPS screener? We can take those two numbers -- the long-term debt to equity ratio and the company's return on equity -- and use the screener to create a list of companies that show well on those two metrics.

That's probably a long list.

Sure. But we've got a great screener, so we can fold in a few other things to help cut down the list. Let's also look for companies with relatively low price-to-earnings ratios (P/Es) that haven't gotten too far above their 52-week lows. That will help us stay clear of the companies you were talking about, the ones that have gotten ahead of themselves value-wise. We can also use the CAPS community's ratings to our advantage.

CAPS ratings? Tell me more.

CAPS is a lot of things, but on one level it's a game; members get scored on how well they pick stocks. The best stock pickers' opinions are weighted accordingly, and the weighted consensus of the CAPS community on any given stock is expressed as a star rating -- one to five stars.

I've found that the star ratings are a pretty good predictor of which stocks are likely to outperform over the next year or so. So -- and this is what makes the CAPS screener so useful -- we can narrow our screen further by limiting ourselves to four- or five-star stocks.

That seems like a good idea.

OK, so let's try it. I searched for four- or five-star stocks that were less than 25% above their 52-week lows, had a P/E of less than 15, a long-term debt-to-equity ratio below 1, and a return of equity of at least 15%. And to make sure the CAPS ratings were worth something, I limited the search to stocks that had been picked by at least 100 active CAPS members. Here are some of the stocks I turned up:

Source: Motley Fool CAPS. LT = long-term.

Ponder that list for a minute. Abbott, Amgen, and ExxonMobil are big, well-known companies with thousands of picks in the CAPS system. But I didn't know much about Becton, Dickinson other than that it was a well-regarded medical technology company. A little bit of digging suggests that it's healthy and looks very well-managed -- oh, and Warren Buffett recently invested in it.

That's a good sign!

Yes and no. Buffett's obviously a masterful value investor. But without a lot more digging, I don't know whether the stock's current price is anywhere near what he paid, for example. It still looks like a good value, but what does he know that I don't yet know?

Also, the fact that it's a Buffett pick may have skewed its CAPS rating a bit. It's a good strategy for players to follow the master's picks, but if that's all the analysis the players did before rating the stock, then it doesn't actually add to our total knowledge about the stock.

Long story short, screening data is helpful, but you need to dig deeper before making an investment.

Yeah, but digging deeper takes time and effort. What do I do if I just want to buy some stocks?

That's easy -- help yourself to a free 30-day trial of the Motley Fool Inside Value newsletter and put the results of the team's time and effort to work for you. Just click here to check out their list of the best stocks for new money now.