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Top-Rated Stocks in the Bargain Bin

By Brian D. Pacampara, CFA - Updated Apr 6, 2017 at 12:07PM

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Another round of cheap stocks for the value investor's soul.

Everyone loves a bargain. Be it at the grocery store, the local flea market, or the neighborhood car dealership, people inherently understand the benefits of getting a great deal.

Yet, despite this infatuation with bargain opportunities, it doesn't occur to many investors that buying cheap stocks is possibly the best way to squeeze a whole lot of bang out of a hard-earned buck. As Warren Buffett says, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

Our penny-pinching process
So, with the help of our community over at Motley Fool CAPS, I'll once again try to find some cheap stocks for all of my kindred stingy spirits.

The approach is far from complicated: We'll run a simple screen for four- or five-star stocks (out of five) with enterprise value-to-EBITDA (EV/EBITDA) ratios below 10.

Dive in the bargain bin
By running this screen, we'll zero in on statistical bargains that, according to our CAPS community, have plenty of great reasons to trade at much higher levels.

Let's dive right in this week's bargain bin:

Company

EV/EBITDA (Trailing 12 Months)

Industry

CAPS Rating (out of 5)

Norfolk Southern

8.6

Railroads

*****

FPL (NYSE: FPL)

7.9

Electric utilities

*****

Johnson & Johnson (NYSE: JNJ)

7.8

Pharmaceuticals

*****

Exelon (NYSE: EXC)

5.2

Diversified utilities

*****

Walgreen (NYSE: WAG)

6.4

Drug retail

****

Data provided by CapitalIQ, a division of Standard & Poor's, and Motley Fool CAPS.

As usual, our list isn't exactly brimming with the most exhilarating businesses. But that should be just fine with us. As sharp Fools know well, boring stories often translate into the market's best risk-adjusted returns.

For starters, FPL and Walgreen look like a couple of companies worth considering.

A new era
Utility stocks are great for downside protection, but, generally, don't offer too much in the way of upside. According to our community, however, electricity giant FPL has the growth prospects and valuation to provide some big gains over the long run.

"FPL" is actually a thing of the past -- kind of. The company changed its name to NextEra Energy last month to reflect the expansion of its clean energy projects and the juicy tax credits that go along with them. With management steering focus toward growth and its leadership position in solar and wind power development, the stock could conceivably gain some much-needed attention.

NextEra, along with other greenish power plays like Exelon are trading at levels that are too paltry to ignore. CAPS All-Star TMFDeej explains:

The economic slowdown has taken its toll on power use and companies in this sector have not escaped the pain. For the most part, power companies have been completely left behind in the recent massive rally in the markets. That makes them an interesting contrarian place to consider investing. Many amazing, well-run companies are trading at incredibly attractive multiples.

Walgreen of worry
When well-known names go on sale, it's tough for Fools not to take notice. Drug store giant Walgreen has been taking it on the chin lately, but the company's brand power and consistently high CAPS rating warrant at least a closer look.

Weak results in the pharmacy division have weighed on recent results. Walgreen posted a surprise 0.2% same-store sales drop for May, its second straight monthly decline, on the introduction of lower-priced generic drugs. And longer-term, retail rivals CVS Caremark (NYSE: CVS) and Wal-Mart (NYSE: WMT), along with pharmacy benefit managers like Express Scripts (Nasdaq: ESRX), should keep pressuring all sides of Walgreen's business.

Nevertheless, Fools continue to be drawn to the company's scale, convenience, and utter familiarity. At a forward P/E of 12, the demographic trends working in Walgreen's favor may be strong enough to earn an attractive return over time.

"The little, big drug store ... they just don't seem like a huge chain," wrote cougarboo33 late last month. "Their stores a convenient, their products are varied, and their advertising targeted. They just keep on delivering. I don't see a fast-rising company in [Walgreen]. ... [B]ut I do see a steady, profitable company that will keep delivering."

A Fool's final word
As always, what we say here isn't meant to be taken as a formal recommendation; we want only to generate some possible ideas that you might find worth further research. If you'd like to scour the bargain bin for yourself, read what our CAPS community thinks, or even chime in with your own opinions, click here to get in the game.

Oh, and it's totally free -- an offer that even the deepest of value investors should never pass up.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor pick. Exelon and Wal-Mart are selections of Inside Value. Motley Fool Options has recommended writing puts on Exelon and buying calls on Johnson & Johnson. The Fool owns shares of FPL. The Fool's disclosure policy always pays the full price for transparency.

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Stocks Mentioned

Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
WBA
$40.59 (1.30%) $0.52
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$132.22 (1.85%) $2.40
Express Scripts Holding Company Stock Quote
Express Scripts Holding Company
ESRX
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$165.30 (-1.10%) $-1.84
CVS Health Corporation Stock Quote
CVS Health Corporation
CVS
$106.39 (2.05%) $2.14
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$46.17 (1.78%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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