5 Low-Priced, High-Star Stocks

Buying stocks simply because they trade for less than $10 remains one of the "lowest" -- but most tempting -- forms of investing out there.

After all, nothing trounces Mr. Market quite like a $2 stock that moves into double digits over just a short period of time. Unfortunately, thanks to 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 the 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 they want. That's the reason a $100 stock like Garmin (Nasdaq: GRMN) might very well be a great opportunity, while most penny stocks are too wild to buy at any price.

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 trading at less than $10 which also have enough investment merit to earn a perfect CAPS rating of five stars.    

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, Tongjitang Chinese Medicines and Stewart Enterprises might be worth some of your own Foolish due diligence.

Chinese medicine men
Holding Chinese traditional-medicine stocks proved to be an irritating experience in 2007, but 2008 just might have a healing effect on shareholders. Tongjitang Chinese Medicines, for example, is off 23% from its 52-week highs, yet is still very much favored by our community. Of the 171 players who've rated the stock, a whopping 99% are bullish. The biggest reason? Valuation.

Tongjitang currently trades at a paltry PEG ratio of 0.50. Of course, baked into that number are some pretty hefty growth expectations -- roughly 23% for the next five years -- so Fools should proceed with extra caution. Still, the stock's intriguing price and double-digit returns on equity, not to mention the seemingly massive demand for alternative Chinese medicine, should warrant at least a closer look.

CAPS player grochowski123 chimes in:

This is a currently profitable company in the Chinese Health Care / Pharma industry that can only go up. In the last 20 years, developments in healthcare in the U.S. has favored pharm companies. I believe this is the direction China will go as well.

Near-death experience
Stewart Enterprises, a Louisiana-based provider of funeral services, is another low-rider that our community has high hopes for. Stewart was a measly two-star stock just five months ago, but has climbed slowly and steadily ever since. Last month, the stock received its first-ever five-star rating.

As with other highly favored death-care stocks, such as Carriage Services and Service Corp. International (NYSE: SCI), our CAPS community likes Stewart as a play on the country's aging population. On a P/E basis, Stewart even trades at a reasonable discount to those peers, so the shares might be offering some value. With the recent addition of $25 million to its share repurchase program, management may be sniffing out a bargain, too.

CAPS All-Star Ayax2006 quotes an unknown source in his pitch:

Smaller player at a good value and possibly an acquisition target... "Funeral services companies are recession-proof and virtually immune to a slowing economy or rising rates -- the market's two biggest fears right now. There's a built-in degree of certainty with the steady supply of customers. And strong cash flow within the fragmented industry makes buyouts plausible and mergers likely."

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.