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5 bargain stocks trading under $5
Not all sub-$5 stocks are bargains, but the field is littered with underpriced gems. We found a biotech, an oil industry stock, a dot-com survivor, a retailer and a computer maker with potential -- all selling for less than a 5-spot.
By Michael Brush
What can you get for $5 these days? Sadly, not too much. It wont buy you a beer at a Mets game in Shea Stadium. Gone are the days when a Lincoln would get you most paperback books. And many casinos dont even have $5 tables any more.
Fortunately for bargain hunters, the stock market still offers plenty of issues that go for well under a fiver.
Strictly speaking, these arent necessarily bargains, of course. A sub-$5 stock is as likely to be overpriced as any other.
But the truth is, you may be more likely to find deals in this range -- for the simple reason that many mutual funds wont consider stocks below $5. That means many of the stocks trading down here are overlooked and neglected. To find a few with a promising outlook, we took a close look at insider buying patterns in stocks under $5 and then dug in to see what was going on. We also consulted stock promoters and chief executives who have put us on the right path with stocks in the past.
We came up with a promising biotech business called Avanir Pharmaceuticals (AVN, news, msgs), a turnaround known as Stolt Offshore (SOSA, news, msgs) in the energy logistics field and a recovering dot-com play called Covad Communications (COVD, news, msgs). We also found a teen retailer called Candie's (CAND, news, msgs) and a wearable computer maker known as Xybernaut (XYBR, news, msgs) thats also a homeland defense play. Heres a closer look.
Avanir Pharmaceuticals
Given the carnage in the biotech sector of late, theres no shortage of sub-$5 stocks in this group. The trick is finding one thats more than just a science project -- one thats got promising drugs about to hit milestone events on the way to approval in the near term.
One possible candidate: Avanir Pharmaceuticals. The companys chief executive, Gerald Yakatan, has 10 years of experience as the head of product development at Warner-Lambert, now owned by Pfizer (PFE, news, msgs). Under Yakatans leadership, Avanir has gotten one drug to market so far. Thats a cold sore treatment known as Abreva, approved by the Food and Drug Administration (FDA) and brought out as an over-the-counter remedy in 2000.
But a few others arent too far off. Chief among them: A treatment for an unusual ailment that causes uncontrollable laughing or crying, known as pseudobulbar affect (PBA). PBA is a neurological disorder that crops up among people who have Lou Gehrigs disease, Alzheimers and multiple sclerosis, and people who have suffered a stroke or brain injuries. About a million people suffer from PBA in the United States, and the worldwide market for a treatment may be worth as much as $1 billion a year, say sell-side analysts.
Avanirs proposed treatment for PBA is a patented combination of dextromethorphan, the drug used in cough remedies, and quinidine, a drug which slows down the metabolism of dextromethorphan by the liver so it stays in the bloodstream longer. The drug combo, called Neurodex, has been proven to work in Phase 3 trials on people who have PBA because they suffer from Lou Gehrigs disease. Neurodex is also in Phase 3 testing on people who have PBA because they have multiple sclerosis. That should finish soon. Then Avanir hopes to file a new drug application for Neurodex before year-end. The company thinks the drug could hit the market in 2006. It will be the first drug approved for the treatment of pathological laughing, predicts chief executive Yakatan.
The drug has also passed Phase 2 tests designed to prove it works on neuropathic pain, or pain that originates in the central nervous system. That can happen because of complications from long-term diabetes, for example. About 40 million people suffer from neuropathic pain worldwide.
Further down the road, Avanir may have treatments for asthma. And its working on another drug that slows down the buildup of plaque in the arteries and reverses it, too, in a process known as reverse cholesterol transport. This prevents plaque buildup and removes it, says Yakatan. That is what is so exciting about this reverse cholesterol transport area. This is two generations ahead of what is out there on the market. Though several of these treatments will come to market years from now, look for near-term catalysts. These include the announcement of funding and marketing partners for these drugs, progress in studies that test how good they are and the filing of an application for Neurodex approval before the end of the year.
Stolt Offshore
Whenever I have a chief executive on the phone, I always wrap up by asking for off-the-record suggestions on other companies in the same industry that look particularly attractive. They dont always answer. But when they do, the suggestion often makes for an interesting investment idea. Thats how I came across the tiny Stolt Offshore earlier this year at $3. Its up nicely since then, to trade at $3.60 recently. But as a turnaround in the early stages, Stolt looks like it may offer more upside.
Stolt provides transport logistics to energy companies that need to move crude oil and natural gas from offshore rigs. Stolt got into trouble a few years back when, faced with lots of unused capacity in the sector, it got into bidding wars with competitors, says Gregg Tenser of NWQ Investment Management, which holds shares in the company. Stolt locked in unprofitable contracts. Whats more, the company overpaid on some acquisitions. This company was truly staring at the abyss, says Tenser.
Last spring, Stolt moved into turnaround mode. It brought in new management with high credibility in the industry, lead by Tom Ehret, Stolts chief executive. He has nearly 30 years of experience in the offshore oil and gas sector, most recently at Technip (TKP, news, msgs).
Next, Stolt took steps to shore up the balance sheet, says Ben Maimon, an analyst with Greenhaven Associates, which also has a position in the stock. Stolt issued new shares, converted debt to equity and sold off non-core assets -- bringing net debt down to $35 million from almost $434 million a year ago.
Now, it is starting to sign more profitable deals. The key is, they are signing better contracts, says Tenser. The company has $1.75 billion in backlog brought on line by the new management team, with solid margins. Thats up from $818 million at the end of February.
Stolt expects to break even this year. And Tenser thinks it will earn 50 cents per share next year. That means Stolt is trading at just six times future earnings. He believes Stolt can hit 80 cents in earnings per share in 2006, which suggests the stock is on its way to $8 per share.
Covad Communications
One of the walking wounded from the dot-com era, this broadband Internet play has been trading around $2 recently. Thats a mere fraction of the $65 traders paid for it back in early 2000. But Covads got a strong enough balance sheet to survive. (The company has $170 million in cash and $125 million in long term debt. It says cash flow will turn positive next year.) Plus, Covad has a plausible plan to boost revenue by selling high-speed DSL Internet service and cheap Voice over Internet Protocol (VoIP) phone service to small companies.
To be sure, doubts linger about the future of the price advantage that makes VoIP attractive. Regulators have yet to decide if they will rule that VoIP is officially a phone service -- a move that would add a host of fees and taxes. VoIP companies argue their packet-based phone service, which sends conversations over the Internet in digitized packets of data, is so different from traditional analog service that it shouldnt be treated and taxed as if its the same thing.
Regulators, on the other hand, did just hand Covad a big potential advantage. The Federal Communications Commission recently ruled that regional Bell operating companies (RBOCs) like Verizon Communications (VZ, news, msgs) soon will no longer have to give competitors a free ride. Right now, adversaries like MCI (MCIP, news, msgs) or AT&T (T, news, msgs) use their local loop networks and equipment for reduced fees. Covad will come out on top if this change holds up, because it has its own equipment embedded inside local networks in nearly 2,000 cities -- plus a national network of its own. So it will still be able to compete with the RBOCs by offering both high-speed Internet access and cheap VoIP phone service to small companies, while others may lose that advantage.
VoIP is just a natural way to leverage our network, says Mark Richman, the finance chief for the company. Its VoIP offerings cost 20%-30% less than traditional phone service, and it has more features. VoIP revenue is expected to blossom to $150 million per year within three years, compared to $10 million now. Thats one reason Richman and chief executive Charles Hoffman recently bought $63,000 worth of Covad shares for $1.66 to $1.86, even though they already have plenty of stock options. Covad is a bulletin board stock right now, but the company hopes to get on a bigger exchange if the stock moves higher.
Candie's
Candies is a tiny clothing designer with a big name among teen girls and young women in their early 20s. The New York-based clothing company markets footwear and jeans under the Candies and Bongo brand names. Its also in the midst of a major overhaul, which insiders think will bring much more upside for this stock. Chief executive Neil Cole started an ongoing buying campaign in Candies shares last September at around $1.85. He has kept buying as the stock has advanced, plunking down more than $680,000 since then. Most recently he bought $52,000 worth at the end of June for around $2.60.
What big change is going on? Basically, this is a retailer morphing into a brand manager. In May 2003, the company licensed its Candie's and Bongo trademarks for footwear to Steven Madden (SHOO, news, msgs) and Kenneth Cole Productions (KCP, news, msgs), which is run by Neil Coles brother. This year, Bongo jeans went to TKO Apparel. Along the way, Candies has closed 24 retail outlets, and it is shutting down production and distribution in a process that should be complete soon.
That means costs are shrinking dramatically. Next year, the company should have $3.5 million in overhead, says Cole, down from $32 million last year. Meanwhile, Candies has guaranteed minimum sales and royalties from the companies that license its brands. And it no longer faces the chief risk in retail: getting stuck with excess inventory. By year-end, we will be a brand management business that owns trademarks, says Cole. It is a very safe business model.
Xybernaut
It may come as a surprise if you spend most of your life in an office, but about half the workers in this country arent tethered to a desk. Yet many of them -- from airplane mechanics to emergency rescue workers -- could do their jobs much better if they had instant access to computer databases and software programs while on the job.
Thats where Xybernaut comes in. The company makes mobile, wearable computers. But in a larger sense, we are an information delivery company, says Michael Binko, the vice president for corporate development at Xybernaut. We provide the right information at the right time to the right person, and most importantly, in the right place. We have wearable and mobile computer products that bring the current information technology infrastructure to the user where and when they need it.
The companys mobile computing gear typically consists of a computer you wear on your belt and a head mounted display or a flat panel you can carry or put on your arm. Xybernaut sells a lot of these systems to the Department of Defense for military applications. But it also sells to companies such as Boeing (BA, news, msgs) and FedEx (FDX, news, msgs), where maintenance workers use the mobile computing devices to consult databases while repairing jet engines or doing airplane maintenance. FedEx tells Xybernaut it can turn planes around in two hours less time, thanks to the mobile computing devices.
Xybernaut devices also are being used by police departments and emergency responders. They consult pre-loaded architectural plans when responding to a fire at a large building or a shopping mall, for example. That way, theyll know the building layout and what materials are inside. This application makes Xybernaut a homeland defense play, of sorts.
Revenue is growing sharply (albeit off a small base). The company brought in $4.4 million in the first quarter, a 150% increase over the same quarter the year before. That was the second quarter of record revenue in a row. Hardware sales shot up the most. Hardware sales totaled $2.9 million, or a 250% increase over the same quarter a year before. The company also has a product support division, which isnt growing as fast.
Insiders have been nibbling on the shares -- buying about $30,000 worth in the $1.20 range since March. That suggests the healthy growth may continue. One reason this might be the case: Xybernaut recently scored a deal with CSX Corp. (CSX, news, msgs), a big railroad thats using Xybernauts Atigo device to help engineers keep track of what cars to pick up as they move through rail yards across the country. Xybernaut hopes it can strike up deals with other railroads -- including those in China. Its also hoping success at FedEx will help it close deals in the airline industry.
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