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, 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 they want. That's the reason a $100 stock like IDEXX Laboratories (NASDAQ:IDXX) 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 the top 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, Secure Computing and Mahanagar Telephone might be worth some of your Foolish due diligence.

Time to be in-secure?
On the surface, Secure Computing -- a company that has reported negative earnings for two of the past five years -- looks like a classic low-priced long shot. But all you have to do is look beyond the income statement to understand why a whopping 522 CAPS Fools like it to outperform, and why it's also a formal recommendation of our Motley Fool Rule Breakers service.

As my Foolish colleague Tim Beyers recently wrote, Secure's allure lies with its healthy cash flow generation. Despite reporting red GAAP numbers, the San Jose-based provider of Internet security solutions has grown its operating cash flow at a compounded rate of 70% over the last three years. Additionally, free cash flow has represented at least 13% of sales in each of them.

The stock is down 17% from its 52-week high, and virtually unchanged from when Tim called it a bargain in April, so Fools shouldn't be scared to put SCUR on the watch list.

CAPS All-Star jnifer4 gives us even more security:

Security is one of the areas growing the fastest in the computer world. ... For example, 10 years ago, you did not see many colleges offering degrees in network security, but now almost all of the reputable universities have Masters (and now even many PHD) Programs in network security. This is a need that is not going to go away anytime soon!

Delhi delight
Mahanagar Telephone Nigam, a provider of telecommunications services, is another low-rider that our community has high hopes for. According to the New Delhi-based firm, they're a leading provider of telecom services in India and one of Asia's largest -- probably a big reason why all 17 CAPS All-Stars who've rated MTE are bullish.

With an EV/EBITDA of 8.9, our community seems to view Mahanagar as a cheap way to play India's rapid growth. Mahanagar has a customer base of roughly 6 million, leaving plenty of room -- theoretically, at least -- for expansion possibilities. The shares are unchanged year over year, but with MTE's healthy dividend -- now yielding 4.4% -- Fools like the idea of being paid to wait.

However, CAPS All-Star Hibachio reminds us not to overlook the competition:

India's cellular industry will (and is) becoming huge, however, MTE ... derives most of its revenue from fixed land lines. I still like them, although I give the nod to Vodafone (NYSE:VOD) (owner of Essar, biggest cell phone company in India) as a more likely (wireless) play. .... Whether MTE will be a big player in (the cellular) market is left to the future.

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.  

Foolish contributor Brian Pacampara swallows a couple of 10-Ks each day to prevent cheap-osis and owns no position in any of the companies mentioned. The Fool's disclosure policy is always in tip-top condition.