5 treasures from the bargain bin

By The Motley Fool

Everyone loves a bargain. Be it at the grocery store, the local flea market or at 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 legendary investor Christopher H. Browne writes in "The Little Book of Value Investing," we should always attempt to "buy stocks like steaks . . . on sale."

So, with the help of our community at MSN Money CAPS, I've tried once again to find some cheap stocks for all of my kindred stingy spirits.

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The approach is far from complicated: We ran a simple screen for five-star stocks -- the highest rating a stock can get in CAPS -- with EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization) multiples below 10. We used this metric, rather than the more common price-earnings ratio, to account for differences in each company's capital structure.

By running this screen, we zeroed in on statistically cheap stocks that, according to our CAPS community, have plenty of great reasons to trade at much higher levels.

As usual, our list isn't exactly brimming with exciting or familiar names.

But that should be just fine with us. As sharp Fools know, boring stories often translate into the market's biggest returns.

The bargain bin

Company	Industry	EV to EBITDA*
Albemarle	Synthetics	9.5
Willis Group Holdings	Insurance brokers	9.3
Covidien	Medical instruments and supplies	8.9
Companhia Vale do Rio Doce	Steel and iron	8.2
Global Industries	Heavy construction	7.0

* Enterprise value to earnings before interest, taxes, depreciation and amortization.

Tyco's tot

Thanks to Mr. Market's broad sell-off, it hasn't exactly been tough to find stocks for this column. After all, the best bargains are created when investors sell even good companies just to "get out" of the market.

So when Covidien (COV, news, msgs) -- a stock that already faces indiscriminate selling pressure of another sort -- popped up on my screen this week, I decided to take a closer look. With 26 CAPS All-Stars bullish about its prospects (and just one lone bear), this might be an extra-special special situation.

For the uninitiated, Covidien is a diversified health-care company that was spun off from scandal-ridden conglomerate Tyco International (TYC, news, msgs) in June. I'll touch on Covidien's business in a second, but it's worth noting that much of Covidien's appeal (for our CAPS community, anyway) lies simply in the fact that it's the product of a spinoff. As we've written many times, spinoffs are beautiful for a variety of reasons -- the most important, of course, being the initial selling pressure of the sort encountered by Covidien.

As for the business itself, Covidien has always been regarded as Tyco's crown jewel, with plenty of value just waiting to be unlocked. Covidien operates five segments (medical devices, imaging solutions, pharmaceuticals, medical supplies and retail products), and our community loves the opportunities to grow in each of them. Covidien ranks fifth in total sales among diversified health-care giants like Johnson & Johnson (JNJ, news, msgs) and Abbott Laboratories (ABT, news, msgs). Now that management is free from Tyco's bureaucratic shackles, it has ramped up R&D to fight for a bigger piece of the pie.

It's impossible to predict exactly when Covidien's selling pressure will cease, but with a bargain-bin ratio notably lower than its peers, a reinvigorated management team and CAPS' bullish sentiment, this spinoff might be worth at least a test spin on CAPS.

CAPS All-Star healthcarevalue likes how Covidien covers all the bases: "Emphasis on medical devices, imaging and medical supplies as well as pharmaceuticals is a good form of diversification among products, as well as a force for growth going forward. As it is a recent spinoff, there is undue downward pressure on the stock."

Meanwhile, darkflame takes us on a treasure hunt of sorts: "Spinoffs tend to outperform the Standard & Poor's 500 Index ($INX). The company might be great and all of that, but playing with probabilities it's enough to score. Check the compensation packages in the Securities and Exchange Commission forms and it might be that you discover the managers are deeply interested in the company. If so, come back and thank me."

Finally, imyoung sums it all up with the "top five reasons Covidien should outperform":

• It is a Tyco spinoff, and spinoffs usually do better than the parent company.
• It is a leader and first-mover in many medical-product categories (many of them well-known brand names).
• It has a large sales force in over 50 countries, with extremely high revenue and net income per employee.
• About 50% of revenue in non-U.S. currency.
• It is undervalued.

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.

This article was reported and written by Brian D. Pacampara for The Motley Fool. At the time of publication, he owned no position in any of the stocks mentioned.