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5 bargain stocks under $5
Not all sub-$5 stocks are bargains, but the field is littered with underpriced gems. We dug up a drugstore chain, a medical equipment maker, a telecom, a tiny software seller and a movie projector company.
By Michael Brush
With Memorial Day weekend behind us, shoppers are turning to a favorite pastime, bargain hunting the summer markdowns.
Investors should do the same: Scour the stock market for low-priced stocks. A good place to start is among those selling for less than $5.
Trading under $5 doesnt always make a stock cheap, of course. A $2 stock can be just as overvalued as one priced at $60. But you can often find decent bargains with great potential in the sub-$5 end of the market -- for three reasons. - First, many big investment companies are prohibited from shopping the under-$5 bin because these stocks are considered too risky. After all, if they are trading below $5, there must be a reason.
- Next, a lot of these companies have small market caps -- which again makes them off limits for the big funds.
- Third, many of these companies are marked down because they do suffer from some problem. But if you can find the companies that are fixing their problems, they can reward you with solid gains, as a prior look at sub $5 stocks showed.
Shopping guidelines
In the spirit of the summer sale, I'll dive into the discount bin and pull out five favorites. First, since low-priced stocks often attract market newcomers, some basic rules for buying these stocks.
1. Don't put too much of your investment money into any one of these companies. Generally no single position should be more than 2% to 5% of your overall portfolio. New investors should consider opening an online brokerage account with commissions in the $10 range.
2. These stocks are not short-term trades. Many are value names, or companies where insiders are buying. In either case, it can take a year or more for underlying trends to mature and move the stock up. If you need a quick hit to cover next month's mortgage payment, dont turn to these stocks.
3. Smaller companies are less liquid, so the stocks can bounce around even if there are only a handful of buyers jumping in. So be warned: If any of these names move up more than 5% on the day this column runs, wait for pullbacks to buy them.
Related news and commentary on MSN Money
Heres a closer look at our current crop of five under $5.
Rite Aid: Following Icahn's lead
Shares of the drugstore chain Rite Aid (RAD, news, msgs) caught fire in mid-May on news that an investment group led by famed 1980s corporate raider Carl Icahn had taken a 2% position in the company.
The news confirmed Rite Aid as a promising turnaround story and value play -- but it moved its shares out of range for investors who insist on a reasonable entry point. So the game plan here should be to wait for the Icahn-induced enthusiasm to wear off and pick up shares in the $3.75 range, suggests Gregg Tenser, a value investor with NWQ Investment Management, who has a position in the stock.
After years of stagnation following a management change in the late 1990s, Rite Aid is beginning to build out its store base in a more aggressive manner. Rite Aid also is planning to join the trend in the pharmacy sector and become a Pharmacy Benefit Manager so it can catch a piece of the drugs-by-mail business. Another catalyst on the horizon: Changes in Medicare that will make it cheaper for seniors to buy medications -- perhaps in 2006.
All these factors should move Rite Aids depressed operating margins closer to industry levels -- suggesting the company has an earnings-per-share potential of 45 cents, says Tenser. Put a conservative price-earnings multiple of 15 on that and you have a $7 stock, for a nearly 100% gain. Just remember, it could be at least two years before this plays out.
Bruker BioSciences: Insider enthusiasm
Bruker BioSciences (BRKR, news, msgs) makes high-tech gear used chiefly by scientists looking for new drugs. Its main products are mass spectrometry and X-ray equipment that help researchers at hospitals and pharmaceutical companies learn more about things like molecules, proteins and chemical compounds.
New lines of equipment helped the company grow revenues by 10% last quarter (before currency adjustments). And Bruker is looking for 10% to 12% sales growth for the full year. Meanwhile, the company is chopping costs following a merger, so profits should grow even faster.
Despite the progress, Bruker is cheap compared to competitors. It trades for a price-to-sales ratio of 1.2, well below even smaller competitors like Ciphergen Biosystems (CIPH, news, msgs) which sells for 1.59 times sales. Bruker also has fairly decent financial strength with $84 million in cash, or around $1 per share.
Bruker insiders are downright enthusiastic. Since last November, theyve purchased $2.6 million worth of shares, including $1.5 million for prices between $3.60 and $4.02 in May. Those purchases were by chief executive Frank Laukien and finance chief William Knight -- which makes the buy signal even more bullish. Usually insiders this close to the action, as opposed to board members, have a better sense of trends at a company.
InFocus: When the dumping stops
InFocus (INFS, news, msgs) sells some of the best movie projection systems for places like boardrooms and classrooms. But that didnt help much in the past six months, when Asian competitors with too much inventory dumped their product on the market, hammering InFocus sales.
InFocus told investors the first quarter would be bad -- because of the excess inventory on the market. But the quarter was even worse than expected. So frustrated shareholders dumped InFocus stock aggressively, pushing it below $4.
Down here around $4, however, the shares look like a bargain. For one thing, the company has about $1.85 per share in cash. High cash levels like that protect against downside for the stock, and virtually guarantee the company has the staying power to make it through hard times.
Second, insiders are buying aggressively. While the stock was selling off, nine insiders, including chief executive Kyle Ranson and finance chief Michael Yonker, bought $287,000 worth of stock for as much as $3.90, or levels not far from where the stock currently trades.
What should move the stock up? Everyone knows next quarter will be bad, too, but the days of huge oversupply are coming to a close, says Ranson. After that, InFocus will compete with low-cost Asian suppliers because it has moved manufacturing to Asia. The company also hopes to stake out a place in the consumer market by trading on its reputation for high-quality projectors used in business and the classroom.
JDS Uniphase: A bubble survivor
Many telecom-equipment makers that flew high during the bubble days are still struggling to get rid of excess capacity. But one of them has an advantage: JDS Uniphase (JDSU, news, msgs).
Thats because unlike competitors, JDS Uniphase had the sense to raise tons of cash back in the bubble, which makes restructuring easier now.
The company has a treasure chest of $1.38 billion, or enough to help it simply bite the bullet and ditch unprofitable product lines instead of nursing them along, says Needham & Co. analyst John Harmon. Another plus: There are no sacred cows in the restructuring, because JDS Uniphase is under new management.
Meanwhile, JDS Uniphase is still a leader in components used in fiber-optic telecommunications networks. True, much of the fiber-optic cable laid during the telecom bubble still lies dormant. But George Putnam, whose Turnaround Letter recommends buying JDS Uniphase shares under $4.50, thinks that will change. Google, for example, is buying dark fiber to build its own network, he says. "Whenever anyone wants to buy dark fiber chances are they will turn to JDS for the equipment to do so," says Putnam.
Because JDS Uniphase burned so many people during the bubble, Putnam doesnt expect the stock to snap back until the companys turnaround becomes obvious. But once profits return, "patient investors who buy the stock now will be very nicely rewarded," he predicts.
Onyx Software: Small company, big customers
Tiny Onyx Software (ONXS, news, msgs) -- with a market cap of just $52 million -- is the smallest of our under-$5 stocks. That means its off the radar screen for many investors. But insiders just put $7.8 million of their own money into the company and thats a bullish signal thats hard to ignore.
Whats more, unlike many financing deals at small companies, this one didnt dilute existing shareholders by giving insiders discounted shares or warrants that will later convert to stock on generous terms. Thats a sign of confidence.
Indeed Onyx, which has a light debt load and is expected to turn profitable this year, didnt need a cash infusion to stay alive. Instead, the company wanted to "bulk out" its cash position to reassure potential customers, says chief executive Janice Anderson.
Onyx sells software that helps businesses manage relations with customers and carry out all the behind-the-scenes work needed to keep customers happy. To be sure, its a small fry in a crowded field of large competitors. But it counts some big fish among its customers, including Starbucks (SBUX, news, msgs), Mellon Financial (MEL, news, msgs), State Street Corp. (STT, news, msgs) and American International Group (AIG, news, msgs).
Whats more, the stock looks cheap, with a price-to-sales ratio of just 0.9. Onyx will always carry a discount because it is small. But software companies typically boast price-sales ratios of 2 or more, suggesting plenty of upside for Onyx as it lands more big customers.
Stock recommendations
As noted above, Ill add buys on JDS Uniphase, InFocus, Onyx Software and Bruker to my Company Focus portfolio for tracking in our stock recommendations section, and Ill report back in a few months on how they've done. I'd wait for a lower price on Rite Aid.
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