Hit the Jackpot With These 7 Stocks

Who doesn't like a great multibagger return? It feels fantastic to make a killing on a stock, and hitting a home run can be a great ego boost and fill your pocket to boot. But to get those great returns, investors often have to take on very high risk, sometimes gambling on the uncertain future of a penny stock.

If the company can navigate around those risks, big returns can accrue to investors who bought when few others would. On the other hand, if the company can't get past its problems, its priced-for-death valuation was simply accurate.

Below are seven companies whose stocks have attracted enormous interest from investors, perhaps because many of the shares trade hands at just pennies a share and seem to offer stock market gamblers the chance for instant riches. But beware of these seemingly get-rich-quick schemes that might leave you as a broke as bar-bar-lemon on a slot machine:

YRC Worldwide (Nasdaq: YRCW  )
Trading at just $3.41, shares of YRC Worldwide can be had for the price of a cup of coffee. But the coffee might last longer. The company just finished the 19th renegotiation of its bank loans, and the effective result is that whatever cash comes in is likely to head straight to the banks' pocketbooks. And in fact, over the past four quarters, the company has paid more in interest ($173 million) than its current market cap ($161 million). With its highly leveraged balance sheet, YRC Worldwide would offer multibagger returns, if it could actually survive and thrive.

Sirius XM (Nasdaq: SIRI  )
The past two years have been kind to Sirius, without a doubt, after the company was almost permanently silenced. The quintessential penny stock, shares of the satellite-radio purveyor dropped below $0.10 in February 2009 and have come storming back to $1.61 now -- nice returns if you could get 'em. In 2009, the company finally generated an operating profit, which has nearly doubled in the past four quarters. In fact, over each of the past four quarters, the company has registered a net profit, a first for the debt-heavy company.

But while the company has made some good operational moves -- such as a broadcasting deal with soccer's Manchester United and a new five-year lock-up with Howard Stern -- its valuation at 11.7 times enterprise value/EBITDA is too dear for me.

Taseko Mines (AMEX: TGB  )
If any stock investment seemed like it was rolling the dice, it would have to be investing in a potential gold mine as gold prices continue to reach multiyear highs. Unfortunately for shareholders, Taseko recently lost its bid for Canadian regulatory approval of its Prosperity gold and copper mine, making the company effectively a pure play on copper. Shares initially dropped 30% on the news, but the company may have another shot at opening the mine, by revising the mine plan to address the key concerns of regulators. Given the company's massive drop on the negative news, I can only expect a huge gain if the mine were to be approved -- exactly the type of binary bet that gambling investors love.

Chimera Investment (NYSE: CIM  ) and Annaly Capital Management (NYSE: NLY  )
Probably the best managed companies on this list, Chimera and Annaly are different beasts from other denizens here. These mortgage real estate investment trusts (REITs) pay gaudy dividends above 14%, which is the big draw, but they won't be able to do so indefinitely. They make money on the spread between short- and long-term rates, so as rates creep higher (as they inevitably will), Chimera and Annaly will be forced to reduce their payouts. Just look at what Annaly did during the latest recession. Many investors think they can get out before the crash, but you never know it's a crash until after it happens.

Cell Therapeutics (Nasdaq: CTIC  )
Nothing says gambling like a cash-burning, small-cap biotech, and Cell Therapeutics fits the bill perfectly, with a $330 million market cap. Last April, the Food and Drug Administration rejected the company's application for its drug Pixuvir as a treatment for non-Hodgkin's lymphoma. The FDA was concerned that trials did not show the effectiveness of the drug, and the agency asked the developer to conduct another clinical trial. Cell Therapeutics appealed the decision and is awaiting a ruling on its appeal during the first quarter of 2011. But the company is also preparing a new drug trial, which would be used as part of new application if the FDA does not change its mind.

Shares are well off their levels of a few years ago, and it looks like even a modest victory would send shares soaring. On the other hand, the company has burned about $70 million in cash in the past 12 months and had just $17 million as of its latest report. So the company needs cash.

American Capital (Nasdaq: ACAS  )
Call American Capital the phoenix of the financial crisis. The stock tripled in 2010 but is still down more than 80% from its highs in 2007. And you can see those moves in its volatility -- which is twice that of the broader market. The company has restructured and paid down $3 billion in debt in the past four years or so, but it still has high leverage, meaning it will probably fail spectacularly or rise meteorica lly.

Foolish bottom line
Some of the stocks here will go on to greatness and some will probably flame out. But just because shares trade for pennies doesn't mean they're bound to go up (or down, for that matter). Instead of betting the farm on these gambles, consider taking a longer-term approach and buying high-quality companies that are poised to prosper whatever the economic climate.

Looking for a stock that isn't just a hit-and-miss gamble? The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Jim Royal, Ph.D., owns shares of American Capital and Annaly. The Fool owns shares of Annaly. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2011, at 5:40 PM, ItAintCool wrote:

    MF must be trying to really help their friends cover their short positions. 3 negative articles on SIRI in the same day. Even MF's SIRI cheerleader, Rick Aristotle Munarriz, starts to express doubts about SIRI in his own piece. Something is up. Somebody associated with MF has got to cover some short positions.

    Don't worry SIRI longs, the stock may be pushed down a few pennies by this negative tripe, but there is nothing to stop it from going up to even greater highs in the new year. Mark my words. SIRI will be at $3.00 or more before the end of the year.

    Profitability, strong fundamentals, higher credit ratings and continual subscriber growth. They can't argue these things, so they say Free Internet Radio will destroy Sat radio. Except it isn't free. This fool James royal complains about the EBITDA, but the SP and earnings have improved over the last year, making it even better EBITDA than it was over the last 2 years. And it only continues to improve every day.

    So please James Royal, tell your readers to miss the opportunity to earn a 100% return on their investment within a year. I'll be back here to rub it in your face for another foolish missed opportunity.

  • Report this Comment On January 10, 2011, at 7:43 PM, motleymarty wrote:

    ItAintCool - you are so right. I'm not worried about SIRI. "Mark my words..." - - my mother of blessed memory used to say that.

    Indeed, as I've posted before, those who can see It will profit.

    Those who cannot, my condolences.

    This happens to be one investment I'm not going to give up on. Another poster wrote, "The writing is so clearly on the wall..." if memory serves.

    Yes, and an old friend visited this afternoon and was so interested in showing me the "free" music apps on his iPhone - told me "this will always be FREE." Guess again.

  • Report this Comment On January 11, 2011, at 10:20 AM, hot1053 wrote:

    Almost all these gambles but one appear to be throwing away money. I expect over half of these to go down further.

    Cell Thera doesn't have enough cash and is way too much of a gamble unless someone is looking into it illegally and knows something.

    The reits are terrible picks, 14% means nothing if real estate doesn't produce income and the properties won't liquidate in this terrible RE market.

    Over leaverage financial companies? Don't waste your breath, expect more bailouts to come and if they don't for small companies like these expect takeunders and/or bankrupcies.

    Coffee companies will do much worse if inflation continues to rise on things everyday consumers use (unlike the CPI which doesn't track average people's wallet.)

    I don't know much about Sirus. Inflation could be good as Sirus may be a way of inexpensive entertainment, but the net and alternative forms of entertainment may reduce listeners. This one is a toss up.

    Tasko (of which I have on CAPS) is the only play I see that could do well. Not much of a gamble as the much cost of the mine not being able to come online has been priced in. That's the only analyisis I agree with.

  • Report this Comment On January 11, 2011, at 10:51 AM, waterinfo wrote:

    In the January 2011 edition of Smart Money Magazine (published by the Wall Street Journal), editor James Stewart wrote an article about 100 baggers........stocks that can turn $10,000 in a $Million.

    Using examples like Wal-Mart, St. Jude Medical, Home Depot, Microsoft and Intel he lists the following attributes for potential 100 baggers.

    1. Unusual competitive advantages, often gained my being first or early into a new market, and a business that has a high cost of entry.

    2. Companies with full or near monopolies where they can legally dominate a market.

    3. High profit margins than don't erode easily.

    Mr. Stewart points to Google, Vale, Baidu, Wynn Resorts, Salesforce.com, and First Solar as companies with these attributes.

    SiriusXM has these attributes in spades.

    Now, you might argue, had you invested in SIRI a little more than a year ago, when you could have bought as many shares as you wanted for 15 cents or less, you already have a ten bagger, and getting to $15 per share from here would make it a 100 bagger. However, very few of us (certainly including me) had the courage to invest a sizable amount of many into a stock that was a weak breath away from bankruptcy.

    However, now that SIRI is on a solid financial footing, can it be a 100 bagger from here?

    Let's look at Mr. Stewart's key attributes.

    1. SiriusXM's competitive advantage is huge, given that to directly compete you would have to spend hundreds of millions of capital on satellites, and hundreds of millions securing talent. Despite my technical background, I'm not sure whether or not it would be feasible for Dish or DirectTV to use any of their capacity to initiate a radio service without launching additional satellites. I frankly doubt it, but even if they could, they would still have a very big obstacle in securing talent and listeners.

    2. It took a while, almost too long, for the government to agree to the Sirius and XM merger, giving SiriusXM not only a natural monopoly (on satellite radio distribution) but a monopoly "blessed" by the key government entities (Federal Communications Commission, Federal Trade Commission, and Securities Exchange Commission) that could have blocked it.

    3. As a service business, with monthly recurring revenue SiriusXM has very high profit margins on existing customers (e.g. an existing customer uses no resources once signed). There are some customer acquisition costs, but those are rapidly decreasing, and some customer turnover, but, by my estimate, at least 70 cents of every new revenue dollar can drop to the bottom line. Moreover, it is a recurring revenue that is negligible to most customers. (For most customers, a 30 cent per gallon change in the price of gas costs them more than a their SiriusXM subscription). Also, looking at the satellite TV model for some possible guidance, my DirectTV subscription in 2000 was $27.95/month. My DirectTV subscription in 2010 now costs me well over $100/month. Some of that is for price increases, but most of it is for additional receivers and additional services. SiriusXM will enjoy the same "revenue creep" as they raise prices a tiny bit at a time, and as customers like me, add additional receivers (I'm about to add my third XM receiver).

    So let's summarize........a competitive advantage, a monopoly market, and non-eroding, growing revenue base and margins. In addition, unlike Wal-Mart, St. Jude Medical, Home Depot, Microsoft and Intel, SiriusXM does not have to sell new products to existing and new customers every year. SiriusXM customers pay for the same product, a month at a time, often for a lifetime. You have to love "recurring revenue" businesses.

    SiriusXM Sounds like a 100 bagger to me, even starting from $1.60/share.

    If not, I'll settle for a ten bagger!

  • Report this Comment On January 11, 2011, at 11:07 AM, TMFRoyal wrote:

    Hi, waterinfo,

    Thanks for the considered commentary.

    Sirius currently has a market cap of about $6.2 billion. A 100-bagger would make this company worth $620 billion. This would be saying that Sirius could be worth more than Exxon Mobil and Google put together. Or two Apples. That's not going to happen.

    Still, it's not hard to see the company going up in price.

    Foolish Best,

    Jim

  • Report this Comment On January 11, 2011, at 1:39 PM, victorytorm wrote:

    i dont understand why you keep telling people that the REIT companies high dividend pay company are bad for them.Everyday you have a comment about it.Don't you have something else to do? Get a life

  • Report this Comment On January 11, 2011, at 2:33 PM, waterinfo wrote:

    to TMFRoyal,

    A. I expect a lot of shares to be bought back along the way and

    B. I'm willing to accept a 10 bagger.

  • Report this Comment On January 11, 2011, at 4:57 PM, multi007 wrote:

    Im not worried about SIRI, however, dont you think the title of the article should include a question mark? As in, "Hit the Jackpot With These 7 Stocks?" This alows the read know that these 7 choices may or may not let you "hit the jackpot". Whereas, the title in its original form leads me to beleive you are going to suggest 7 stocks to invest in... Clearly a misdirection

  • Report this Comment On January 17, 2011, at 11:30 AM, foorpool wrote:

    multi007... TMF has used this misdirection for years. It's a shame because it, in my mind, diminishes the otherwise good information the articles often have. It is TMF that hits the jackpot selling you their newletters.

  • Report this Comment On January 19, 2011, at 12:55 AM, Blueman1000 wrote:

    As an independent investor I've said it once and I'll say it again. Just because these so called experts divulge their positions doesn't mean they're not pushing stocks. I have and I will continue to learn more from the point counter point posting in these columns than all the hoop-la these so called experts push out, thank you each and everyone of you for your educated postings.

  • Report this Comment On January 19, 2011, at 6:48 AM, transplant87 wrote:

    These so call experts are missing another stock chance...VCSY can be bought for under 3 cents but it will not stay that way for long. It has the leading Technology patents out there, but has been running in a "Stealth" mode. VCSY won a lawsuit over Microsoft for infringing on their patents....don't be fooled, VCSY will make you rich one day soon...imo

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