People love shortcuts. Whether it's by doing technical analysis, blindly following the advice of talking heads, or engaging in rapid-fire day trading, investors often do dangerous things to try to generate investment gains. Of course, another one of the more popular shortcuts is looking for low-priced stocks under the assumption that they could "pop" at any moment.
Unfortunately, this doesn't happen as frequently as one might hope, because of the numerous risks that low-priced stocks carry.
Nevertheless, the fascination toward low-priced stocks probably persists for the following reasons:
- They are often considered dirt cheap.
- They are linked with turnaround situations.
- They are associated with small, obscure, and ignored companies.
Price means nothing
Here at the Fool, we do our darnedest to diagnose, prevent, and even cure the critical stock-affliction known as "cheap-osis" -- the belief that a stock's per-share price, on its own, tells you whether a stock is cheap or expensive.
Through the use of splits and reverse splits, management can make the price of its shares literally anything it wants. That's the reason a $100 stock like Lockheed Martin (NYSE: LMT ) might very well be a bargain, while most penny stocks are too risky to buy at any price. It's the business valuation that counts most.
The rules of high/low
Sadly, though, some incidents of cheap-osis will never be cured completely. So, with the help of our Motley Fool CAPS intelligence database, we'll screen for stocks trading at less than $10 that also have enough investment merit to earn a CAPS rating of five stars -- the highest score a stock can receive.
So without further ado, here's this week's list of low-priced, high-star stocks:
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Company
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Price (as of 02/16 close)
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Frozen Foods Express (Nasdaq: FFEX )
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$8.22
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Medical Staffing Network (NYSE: MRN )
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$6.89
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Winthrop Realty Trust (NYSE: FUR )
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$6.77
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i-CABLE Communications (Nasdaq: ICAB )
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$4.80
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Sonic Foundry (Nasdaq: SOFO )
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$4.24
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As always, don't view these stocks as formal recommendations, but rather as ideas you may want to research further.
With that said, Frozen Foods Express is one interesting low-baller that might be worth some of your own Foolish due diligence.
Frozen returns forever?
As North America's largest temperature-controlled trucking company, Frozen Foods has been feeling the ill effects of a national driver shortage, a rise in fuel prices, and a softening freight economy. New regulations regarding service hours and engine technologies have also been taking a toll. As a result, Frozen Foods' operating results have been stone-cold of late -- revenue remained relatively flat throughout 2006, while net and operating income dropped in the third quarter. Unfortunately for investors, Frozen Foods' stock -- reflecting the tough trucking industry -- currently trades at nearly 40% off its 52-week highs.
Yet despite all of the reasons to worry, Frozen Foods is steadily building a loyal group of supporters within our CAPS community. Here are some of the reasons why.
Although Frozen Foods' top and bottom lines have been sitting on ice, CEO Stoney "Mitt" Stubbs Jr. and his team are doing an admirable job in managing their way through the harsh environment. Among the cost-cutting initiatives that management has already undertaken are a significant reduction in headcount and the sale of underperforming, non-core assets -- such as its stake in AirPro, a maker of air-conditioning parts. Management has also found several ways to haul more freight without necessarily adding more drivers, through a major investment in profit-analysis technology.
A non-perishable stock
Now, these actions could easily be classified as "common" restructuring procedures that all struggling companies carry out. But in the case of Frozen Foods, operating margins actually increased in the third quarter as a result of its many initiatives. It's pretty uncommon for margins to increase while sales remain flat -- let alone decrease -- so it's good to know that Frozen Foods is at least learning how to become more efficient. Of course, there's only so much cost-cutting that any management can perform, and superior sales growth is what eventually drives superior returns. Here, the news is also encouraging.
Although Frozen Foods derives most of its revenue from its full-truckload (FTL) operations, about one-third of the company's business is in less-than-full truckload (LTL). This is uncommon among temperature-controlled trucking companies, and it gives Frozen Foods a much-needed boost in tough times. "Perishable" LTL has, in fact, been proving to be a sweet source of growth for Frozen Foods, and management expects that side of the business to carry most of the weight (or should I say freight) in terms of margin expansion and revenue growth. Additionally, the board recently authorized a 750,000-share buyback based on Stubbs' confidence in the future.
So, given the company's cost-cutting initiatives, support from the LTL segment, and a possible sign that the stock is cheap -- in the form of a major buyback program -- Frozen Foods looks like a pretty appetizing proposal. More importantly for Fools, though, is that this is one low-priced stock with a reasonable shot at the double-digit big time.
Now, in case you're still afraid of getting freezer-burned by Frozen Foods, here are two CAPS residents who have fresh things to say about the company:
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ca92590: "great leadership making good decisions in a tough transportation industry. Focus on refrigerated shipments is a niche."
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Zikar: "Massive buyback of stock + reinstating dividends for first time in years = Outperform."
The Foolish conclusion
Despite our Foolish attempts to educate the investment public about cheap-osis, the allure of low-priced stocks is simply undeniable. The good news, though, is that there are indeed single-digit wonders out there that can also make great investments.
So if you really have a bad case of the 'osis and would like to find more good low-priced stocks for yourself, then head over to our Motley Fool CAPS community. Within a few minutes, you'll have your own non-perishable feast of healthy stock ideas.
For more CAPS-related Foolishness:
Fool contributor Brian Pacampara discounts cash flows to prevent cheap-osis and holds no position any of the companies mentioned. The Fool's disclosure policy is always in tip-top shape.
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