5 Low-Priced, High-Star Stocks

Buying stocks for less than $10 remains one of the most tempting forms of investing out there.

After all, nothing trounces Mr. Market quite like a $1 stock that moves into double digits over just a short period of time. Unfortunately, because of the numerous risks that low-priced stocks carry, these mega-multibagger returns don't occur as frequently as one would hope.

Price means nothing
Here at the Fool, we do our darnedest to diagnose and prevent 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, attractive or unattractive, a winner or a loser.

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 FEMSA (NYSE:FMX) might very well offer a great opportunity, while most penny stocks are too risky to buy at any price.

For us Fools, price is nothing, and thirst (OK, business valuation) is everything.

Your weekly dose of sweet 'n' 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 that trade for less than $10 but also have enough investment merit to earn a CAPS rating of five stars -- the highest score a stock can receive.

So, without further ado:

As always, don't view these stocks as formal recommendations but rather as ideas you may want to research further. With that said, Website Pros and MoSys might be worth some of your own Foolish due diligence.

Go with the pros
Over the past few years, Website Pros has been riding the wave of businesses wishing to establish and maintain a strong Internet presence. In fiscal 2006, the Jacksonville, Fla.-based website developer reported a profit of $8.6 million on revenue growth of 38%, while its subscriber count stood at approximately 74,000.

As a result of consistent top-line growth and strong strategic alliances -- which include the likes of IBM (NYSE:IBM), MasterCard, and Register.com -- Website Pros isn't exactly the most underfollowed low-priced stock in investment land. According to Thomson/First Call, seven professional analysts cover Website Pros -- a relatively large number considering its micro-cap status.

As regular Foolish readers know, I'm weary of stocks with huge analyst coverage, because the collective estimates tend to get baked pretty efficiently into the stock price. However, with a five-year expected growth rate of 30% and a P/E of 20, Website Pros might still be a reasonable offer at today's levels.

Here are two CAPS players who've developed and maintained succinct arguments for Website Pros:

• jaygatsby49: The financials look solid enough, and they are profitable. My only concern is that WSPI was able to rise in part by the Web 2.0 boom which is ready to end this year (let's hope). The question is the extent to which this will affect WSPI. I think they are stable enough now to adjust when the day comes when everybody stops trying to be a blogger.
  
• mortadella: WSPI is showing good organic growth and should be able to grow the top line at 25% plus for the next few years. With a strong balance sheet and over $2 share cash the company looks cheap!

A way Wii can profit?
When I ran across MoSys as a possible way to profit from Nintendo's affordably priced Wii system, I just had to single it out from week's list. I love the Wii. The innovative but intuitively simple motion-sensor remote lends itself to a huge demographic that isn't limited to just hardcore video gamers. Even my grandmother was "Wii bowling" with us the other night (and boy, did she ever dominate).

MoSys, whose industry-standard 1T-SRAM memory chips are used in the Wii, reported a profitable fourth quarter based largely on the $3.2 million worth of royalty revenue from Nintendo. That number should only go up as the Wii's popularity grows, but current design wins from other big names such as Sony, and Fujitsu in the imaging field, as well as Yamaha and LG in cell phones, will also add nicely to MoSys' royalty stream going forward. Currently, MoSys receives 2%-5% of each product sold that uses its memory chips.

With MoSys' PEG of 1.4, I'm not overly excited about the current valuation. However, since it also has more than $81 million in cash and short-term investments, zero debt, and favorable conditions in consumer electronics and communications, my concerns could easily prove unwarranted. For example, these two CAPS pitches are more than just a Wii-bit bullish on MoSys' prospects:

• NetscribeTech: The year 2007 will also see more and more products, which will be packed with enhanced features like extra memory, more battery life, and improved quality in both video and audio streaming. ... Endorsing this backdrop, the company stock is expected to do well in 2007.
• SreeRama: Great balance sheet; some interesting IP portfolio; opportunity to ride the Wii bandwagon that the world has come to adore.

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. It's 100% free -- the lowest price you'll find anywhere.

For more CAPS-related Foolishness:

• Pitches and Ditches in 27 Seconds
• 5 Dynamic Dividend Stocks
• 7 Highly Rated Stocks on Sale

Fool contributor Brian Pacampara reads the financial footnotes to prevent cheap-osis and holds no position in any of the companies mentioned. MasterCard is a Motley Fool Inside Value choice. Nintendo is a Stock Advisor pick. The Fool's disclosure policy is always in the best shape of its life.