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5 more sub-$5 stock picks with outsize prospects
There's no guarantee, but low-priced stocks can mean higher rewards if you call them right. Here are five stock picks with the potential to rev up fast.
By Michael Brush
Talk about beginners luck! I know, from a flood of mail keyed off my July 21 column on five stocks under $5, that market newbies love low-dollar stocks. Their luck also might just bring good fortune to these names.
Three stocks from that column -- Candie's (CAND, news, msgs), Avanir Pharmaceuticals (AVN, news, msgs) and Stolt Offshore (SOSA, news, msgs) -- have risen 85%, 70% and 42%, respectively, in just over two months, as of Oct. 1.
The other two are losers so far, but the three winners more than offset the losses. The total return for all the stocks in the column, using prices from the close on Oct. 1, was 38%.
From an investment perspective, this fascination with low-priced stocks makes some sense.
While theres no evidence that low-priced stocks outperform in general, these microcaps do tend to bounce around a lot more. If you pick them right and good news strikes, they move up big time. And their volatility means you can get a good entry price if you set limit orders and wait.
Though I know full well that past performance is no guarantee of future results, I decided to take another crack at five sub-$5 stocks. Beginners in the stock market are reminded to stay diversified and start small. Keep in mind that while three stocks in my last column paid off in a hurry, professional investors are willing to wait a year or more for good results.
Newbies should shop around for an online brokerage account offering commissions in the $10 range so they dont have to sacrifice too much of a starter portfolio in fees.
Now, heres our new crop of under-$5 stocks.
Managing the paperwork
If the jobs not over until the paperwork is done, then its no surprise that organizations from Procter & Gamble (PG, news, msgs) to the North Atlantic Treaty Organization have Captaris (CAPA, news, msgs) products on hand to make sure that paperwork lands on the right desk.
Captaris gets most of its revenue from sales of its RightFax servers, which help users percolate faxes, data and electronic documents smoothly.
Captaris enjoys 25% to 30% market share in the fax-server market, says Chad Bennett, who covers the stock for Miller Johnson Steichen Kinnard. Revenue growth looks impressive, up 17% last quarter over the year-ago quarter, if you back out the revenue a year ago from a division that Captaris has since sold.
The fax-server market is growing in upper single digits and they are taking share, says Bennett.
So why the $4.30 share price and rock-bottom valuation?
While revenue is growing, earnings are stuck in second gear. Chalk it up to high expenses and difficulty integrating a new document-flow software line called Teamplate, which Captaris picked up in a recent acquisition. These integration issues cast a cloud over Captaris, given that a big part of its expected growth is to come from acquisitions.
All this means buying shares of Captaris now is a bet that the company will master the art of integrating new product lines. Will it? Captaris has a lot of experience in its field, so it makes sense to think so. And insiders recently cast theirs vote by purchasing shares.
At least one thing is pretty certain: There may not be too much risk in buying shares now and waiting -- as long as you have a long-term horizon. The stock has $2.82 per share in cash, and this protects against dramatic downside. It also explains why Captaris is a favorite of John Buckingham, who manages an outperforming value fund called The Al Frank Fund (VALUX) and pens a top-ranked investment newsletter called The Prudent Speculator. Another plus, says Buckingham, is that the company is buying back shares, which shows it has faith in its cash flow.
Biotech delivery
Thanks to advances in nanotechnology, researchers are coming up with better ways to get medications to the right places inside our bodies. But companies specializing in innovative drug delivery, such as Alkermes (ALKS, news, msgs) and Acusphere (ACUS, news, msgs), are being pummeled.
Recently, Frank ODonnell Jr., the chief executive at another battered company in this space called BioDelivery Sciences International (BDSI, news, msgs), said enough is enough. A family trust of his has plunked down more than $630,000 since late August to buy BioDelivery stock in the $2.40 to $3 range. The stock recently traded for $2.90. Its a depressed sector, but in my view, it is unfairly depressed, says ODonnell.
Indeed, BioDelivery may have a couple of growth catalysts around the corner.
First, let's look at the basics of what BioDelivery does. The company develops ways to coat tiny particles of drugs with everyday food products like soy or calcium. The coating protects the drug inside the body, and the right coating can bind with the cells where health problems originate. That delivers drugs to exactly the right place, says ODonnell.
The company is also developing dime-size patches to put on the lining inside your mouth. The patches dissolve in minutes and deliver drugs quickly into the bloodstream.
So what are the catalysts? BioDelivery should be able to bring these delivery systems to market relatively quickly since it isnt testing new compounds, which take longer to get approved. For example, the company should be able to file for fast-track approval of a delivery system carrying an anti-nausea drug in the first quarter of next year. In the middle of next year, it should start Phase 3 trials on the use of its delivery technology for a drug called fentanyl, a painkiller. And food and beverage companies may start using the coating technology next year on Omega-3 fatty acids -- thought to reduce cardiovascular problems. Along the way, the company could score more deals with other drug companies looking to apply its technology.
Telecom triple play
Wall Street analysts turned sour on Zhone Technologies (ZHNE, news, msgs), a tiny telecom-equipment company, when it reported soft earnings numbers in late July. But as Zhones stock slid, one insider turned downright exuberant, snapping up $3.8 million worth of stock in the $3 range.
When it comes to a standoff between Wall Street analysts and insiders, Ill go with the insiders most every time. To be sure, theres some doubt about the potential demand for Zhones equipment. The gear helps phone companies offer the so-called triple play. That means broadband, voice over Internet protocol (VoIP) and television over broadband, known as Internet protocol television (IPTV).
Many analysts doubt that U.S. phone companies will ever really offer the triple play. Others say that as traditional phone service turns into a commodity, regional companies like Verizon Communications (VZ, news, msgs) will have to morph into entertainment pipelines and offer the broadband plays if they want to survive.
Regional phone companies dont have any choice but to provide the triple play, says Zhone Chief Executive Morteza Ejabat. They have to do that. So even though the telecom industry is in trouble, there are several areas that are very promising and they are growing.
Then why the weak earnings numbers recently? Blame it in part on a legacy telecom-equipment business that is in decline. That wont last forever. When that problem begins to fade, spending by phone companies on equipment to offer the triple play may help Zohne get back in the zone.
Phone service turnaround
Norstan (NRRD, news, msgs) is a tiny company that sets up phone and data systems and call centers for the government, universities and private companies. At a recent price of $3.10, it could offer outsized gains for investors. The company recently popped up on my radar screen when it got huge upward revisions to its earnings estimates -- often a sign of more earnings growth to come.
You can chalk the growth up to new managers brought in last February to refocus the company on core customers and products, and to trim costs. The handiwork of the new team paid off for the first time in the most recent quarter.
But as a midstage turnaround, thats not the last of it. While Norstan admits it doesnt expect revenue growth in the coming 12 months, it should get a kick from cost-cutting and higher-margin business. And further down the road, theres lots of room for growth, suggests finance chief Robert Vold.
The market we are in is huge, says Vold. We have a history of being a very good service provider on a regional basis, and we believe we can increase our share. Unlike many phone-system providers, Norstan isnt aligned to just one equipment supplier, so it has the flexibility to offer the right systems for the job, says Bennett, the analyst with Miller Johnson Steichen Kinnard.
Theres another plus, too. This stock is brutally cheap, says Bennett. At $3.10, he calculates Norstan trades below private takeout valuations. I dont believe the stock reflects the improvement in profitability, says Bennett. If it was, it would be trading between $4 and $5.
Serving the semiconductor elite
Like most semiconductor-related companies, Nova Measuring Instruments (NVMI, news, msgs) got crushed in the past six months, falling to $3.30 recently from above $7 back in April.
Although its a small company, which helped contribute to the severity of the sell-off, this semiconductor measurement and testing company has a powerhouse of a customer base. Its client list boasts all the top 20 chip makers, including Intel (INTC, news, msgs), IBM (IBM, news, msgs), Texas Instruments (TXN, news, msgs) and Motorola (MOT, news, msgs).
They have agreements with virtually everybody out there, says T.C. Green, a portfolio manager with Regal Securities Investment, which has a position in the stock. The only one they dont have is KLA-Tencor (KLAC, news, msgs), and my understanding is that in the not-too-distant future that company is going to become a customer, as well.
The other catalyst would be a recovery in the chip sector, though its not clear when that will happen. Meanwhile, Nova has $2 a share in cash and recently turned profitable, which means it wont have to eat into that cash hoard. That offers some downside protection for investors who buy now.
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