It's hard not be tempted by low-priced stocks. Psychologically, any number that's a stone's throw away from "0" naturally indicates to us that the bottom should be near by. After all, it's a lot easier for investors to fathom a stock doubling from $2 to $4 than from $50 to $100.
This attraction to low-priced stocks probably happens for a few reasons:
1. They are often considered dirt cheap.
2. They are linked with turnaround situations.
3. 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 it 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 companies such as Chicago Mercantile Exchange (NYSE: CME ) -- whose shares are priced well above $100 -- might very well be bargains, while most penny stocks are too risky to buy at any price. In the end, 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 lovely and incredibly talented assistant, the Motley Fool CAPS community-intelligence database, we'll screen for stocks trading for less than $10 and also have enough investment merit to earn a CAPS rating of four or five-stars. "High-star" stocks are investments that the CAPS community, in general, believes will outperform the formidable Mr. Market.
So, without further ado, let's shuffle up and deal. Here's this week's five-stock hand of high/low:
|
Company
|
CAPS Rating
(out of 5 stars)
|
Price
(as of 12/27 close)
|
|
PAR Tech (NYSE: PTC )
|
*****
|
$8.90
|
|
Spherion (NYSE: SFN )
|
*****
|
$7.80
|
|
Lawson Software (Nasdaq: LWSN )
|
*****
|
$7.47
|
|
RITA Medical Systems (Nasdaq: RITA )
|
*****
|
$4.60
|
|
Tiens Biotech Group USA (AMEX: TBV )
|
*****
|
$3.52
|
As always, don't view these stocks as formal recommendations but rather as ideas you may want to research further. As fellow Fool Rick Munarriz reminds us each year in his own search for low-priced blockbusters, stocks trading in the single digits are pretty risky for a variety of reasons.
But with that said, two stocks on the list, Spherion and Lawson Software, might be worth some of your own Foolish due diligence.
Low-price cost cutter
Spherion heads into 2007 with a continued emphasis on major cost-cutting initiatives, especially with regard to its payroll. CEO Roy Krause has consistently shown a preference to expand the company's margins and returns rather than sacrifice profitability to grow the top line at a faster pace -- a conservative approach that I'm always willing to applaud, as long as it benefits long-term shareholders.
Although Spherion definitely needs to start growing sales in a more inspired manner if it wants to increase shareholder returns over the long haul, Krause is delivering the goods with respect to the current cost-reducing objectives. In early November, Spherion reported a 61% increase in net income for the third quarter, despite minimal revenue growth. On top of that, the company bought back 118,000 of its shares, to complete a buyback authorization for 6 million shares at an average price of $8.76.
Spherion certainly exhibits some attractive investment characteristics that aren't generally found in many low-priced stocks. With a strong brand name, margin-improving business initiatives in full gear, and a positive long-term outlook for the industry, this single-digit stock seems quite deserving of its five-star rating.
Is Lawson a buyout bargain?
Lawson Software, a provider of enterprise resource planning software, is another low-riding stock that looks like an attractive risk/reward proposition. As fellow Fool Tom Taulli mentions in Lawson's latest earnings take, the stock has languished between $5 and $7 for quite some time on rumors of a buyout.
I'm always willing to take a closer look at buyout candidates, because the rumors alone might be a signal that there's something particularly attractive about the investment -- whether it's the company's valuation, assets, or even growth prospects. In the case of Lawson, this low-priced stock has developed a niche within the business-software space by serving mid-sized companies in a few specific industries -- financial services, health care, retail, and public services.
In addition, the recent merger with Intentia gives the "new" Lawson a larger scale, a wider product offering, and greater international reach than it's ever had. Although Lawson has had a difficult time integrating the merger, it's this type of potential that has investors believing it's a yummy target for Larry Ellison's Oracle (Nasdaq: ORCL ) . More importantly for Fools, though, is that it might just be another low-priced, five-star stock that soon sees the double-digit big time.
The Foolish conclusion
Despite our Foolish attempts to educate the investment public on 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 make great investments, too.
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.
See you next week (and next year), Fools. Until then, keep on shooting for the high stars!
Foolish contributor Brian Pacampara discounts cash flows to prevent cheap-osis and holds no position in any of companies mentioned. The Fool's disclosure policy always gets a five-star rating.
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