A Trio of Bargain Stocks

Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a  complete tally of stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

New 5-Star Stocks

Alleghany

• Economic Moat: Narrow
• Business Risk: Average
• Price/Fair Value Ratio*: 0.75
• Consider Buying: $366.30 or Below
• Consider Selling: $595.10 or Above

Alleghany's  shrewd value-investing philosophy, coupled with a talented management team and information advantages at its insurance subsidiaries, endows favorable prospects in Morningstar analyst Justin Fuller's view. However, Fuller thinks Alleghany's economic moat is only narrow, as returns depend on sustained managerial skill and rationality. Sustainability of its competitive advantages notwithstanding, the shares look cheap.
 Full Analyst Report: Alleghany

Crosstex Energy

• Economic Moat: Narrow
• Business Risk: Below Average
• Price/Fair Value Ratio*: 0.76
• Consider Buying (XTXI): $34.10 or Below
• Consider Selling (XTXI): $52.50 or Above

The leveraged claim on earnings growth that Crosstex Energy Inc. (XTXI) holds in Crosstex Energy LP , its master limited partnership (MLP) subsidiary, means that XTXI should continue to grow more rapidly than XTEX. All of XTXI's assets and earnings come from its ownership interests in the MLP, of which it owns a 2% general partner stake, incentive distribution rights, and 38% of the common and subordinated units of the partnership. This ownership stake increased in 2006, when XTXI purchased half of the 12.4 million units XTEX issued to help fund its acquisition of Chief's gathering system. XTXI is now entitled to 38% of the quarterly distributions XTEX pays its unitholders, plus 2% of the total cash it pays out to unitholders for its general partner stake, plus incentive distributions designed to align management's and common unitholders' interests. Morningstar analyst Jason Stevens continues to expect the Barnett Shale to be Crosstex's primary driver of earnings growth. Crosstex invested $700 million in gas gathering, processing, and transportation assets in and around the Barnett in 2006 and plans to spend another $155 million this year, and Stevens thinks every dime is well spent. Crosstex is building a dominant position in gas gathering and processing, and as more wells come online, we expect cash flows to ramp up significantly.
 Full Analyst Report: Crosstex Energy
 Stock Analyst Note: "Fair Value Changes for Crosstex" (5/2/07)

JDS Uniphase

• Economic Moat: Narrow
• Business Risk: Above Average
• Price/Fair Value Ratio*: 0.56
• Consider Buying: $15.90 or Below
• Consider Selling: $30.20 or Above

A solid outlook for optical equipment--spurred by burgeoning demand for bandwidth-intensive applications like video and software on-demand--and a company-redefining acquisition of optical testing firm Acterna have reinvigorated JDS Uniphase (JDSU). Morningstar analyst John Slack believes the firm's one-stop-shop approach positions it well for sustainable long-term growth. Further, he's encouraged by the company's efforts to insulate itself from the volatility of the telecom supplier market, as management has significantly pared fixed costs from its optical component manufacturing process, thereby offering the promise of improved margins and considerable operating leverage as demand picks up. Though it remains a risky stock, in Slack's opinion, given the inherent lumpiness in demand for the company's products and increasing pressure from Asian-based competitors, it's also cheap. Thus, investors with a suitably long time horizon and a stomach for ups and downs might want to give it a look.
 Full Analyst Report: JDS Uniphase

* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, May 4, 2007.

Recent Updates on 5-Star Stocks
Lowering Our Fair Value Estimate for CheckFree (Lowering Fair Value)
After reviewing CheckFree's  recent acquisitions, we are lowering our fair value estimate, as we believe the company has overpaid. We project revenue to grow at a 9% compound annual rate over the next five years, primarily through increasing consumer adoption of electronic bill payments, partially offset by pricing declines. We have muted our margin projections, as the businesses CheckFree will acquire have much lower operating margins. After a small dip upon absorbing these companies, we still project CheckFree's operating margins to improve slightly, from 21% in fiscal 2006 to 23% by fiscal 2011, thanks to the scalability of the business. If margins stabilized at their fiscal 2006 level, our fair value estimate would decrease further.
Brett Horn

Panera Reports April Sales (Maintaining)
After reviewing Panera Bread's  April sales, announced May 2, we are sticking with our fair value estimate. The chain of bakery-cafes reported a 3.1% increase in comparable sales for the four weeks ending April 24; this was up from the 0.2% decline in March. Panera continues to roll out new salads, sandwiches, and other menu items. The company is also directing renewed energy toward improving customer service. We are encouraged by Panera's most recent progress and remain optimistic about its long-term prospects.
John Owens

Taro Pharmaceutical Looks Cheap (Maintaining)
Taro's (TAROF) share price continues to fall, and we think it represents a compelling investment at these levels. Rarely do we see a generic drug manufacturer trade at such a discount, especially considering Taro is a leader in topical drugs, a rare generic drug oligopoly with high gross margins. We think the market also gives no credit to Taro's new injectables facility or T2000, its proprietary candidate for essential tremor. The company is this cheap partially because investors hate uncertainty; Taro lacks current financial statements, may negotiate a dilutive restructuring with its creditors, and is controlled by a family that has been hesitant to do right by minority shareholders. Taro is also hamstrung by overhead and other strategic disadvantages best eliminated in a sale to a larger competitor. A sale becomes more likely if creditors take the reins, but it's not critical to our fair value estimate. At these prices, there should be enough value to go around for all parties involved.
Brian Laegeler

Time Warner Releases First-Quarter Results (Maintaining)
After reviewing Time Warner's  first-quarter results, we are maintaining our fair value estimate. On the surface, revenue growth looked solid, while earnings were less than stellar. However, a deeper analysis revealed just the opposite. Overall revenue growth of 9% was driven by a 61% increase in revenue from Time Warner Cable , which acquired a portion of Adelphia's cable systems in the third quarter of 2006. Without this acquisition, Time Warner Cable's revenue growth would have only been 12%, and Time Warner's overall revenue would have actually declined by 2%. Conversely, the 18% decline in net income was the result of several one-time charges and accounting adjustments; excluding these charges, operating income actually improved 19% compared with the prior-year quarter. The main drivers of improved operating profits were higher profits at AOL and Time Warner Cable, partially offset by declines at the filmed entertainment and publishing units.
Larry Witt