FOOL ON THE HILL
Ten Stocks Under $10

Low-priced stocks -- those trading between $5 and $10 a share -- are an intriguing lot. They haven't been cast away into the penny-stock bin. Many haven't gone "ping" on Wall Street's radars. They can go either way. Many already have, and have crawled back or fallen down into a low price range again. Here are 10 select companies -- an "imperfect 10," if you will -- of stocks looking to break out of the pack.

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Rick Aristotle Munarriz (TMF Edible)
July 12, 2001

In the stock market, you usually get what you pay for. Low-priced stocks are typically either obscure companies you've never heard of, or fallen fliers you don't want to hear from again. With one foot in the penny-stock wading pool and the other on the cusp of legitimacy, they represent a bastion of fear and promise. These $5 to $10 per share stocks find themselves at the Wall Street crosswalk that separates reward from risk's most dangerous intersection.

In seeking candidates for today's column, I did a lot of digging. Every time I came across what appeared to be an amazing value, no sooner was I clearing my throat to ask "What's a quality stock like you doing in single digits like this?" than I would remove my goggles and see the ugly inside: coarsely wrinkled income statements, out-of-shape balance sheets, and punctured expectations. 

We've said it time and again: Stock prices and potential do not go hand in hand. A $100 stock can go to $200 just as quickly as a $10 stock can go to $20. As long as you avoid speculative dealings in the penny-stock market, a quality company is a quality company. That said, here are 10 interesting stocks from the low-price camp, fundamental warts and all. (Prices are as of Wednesday's close.)

Suburban Lodges of America (Nasdaq: SLAM) -- $7.80 -- As the leading chain of economy extended-stay hotels, Suburban is a mixed bag in these slow economic times. Companies have cut back on travel costs -- which has been a major blow to the extended-stay lodging industry -- but as the value champ Suburban has outperformed its peers as an expense-shaving alternative. The layoff shuffle also finds penny-pinchers pitching temporary tents in new cities or taking up temp assignments away from home.

Last month, the company generated average weekly revenue per available room of $166. That's nary a dip from the $166.59 it commanded in June 2000. The company is trading for less than half its book value. Earnings came in at $0.41 a share last year with slow yet steady growth expectations calling for $0.47 this year and $0.53 come 2002.

Warts? Earnings peaked back in 1999 with a $0.53 a share showing. Margins, too. Suburban's balance sheet is also leveraged, with more long-term debt on hand than the company's entire market cap.

TiVo (Nasdaq: TIVO) -- $6.00 -- Pausing live television. Whisking past commercials. TiVo has pioneered the art of personal television and walked away with brand name ubiquity. While competing against SonicBLUE's (Nasdaq: SBLU) ReplayTV and Microsoft's (Nasdaq: MSFT) Ultimate TV, TiVo is the established leader, grabbing 200,000 subscribers earlier than anyone expected. TiVo users are a loyal lot, too, with 96% of those surveyed looking forward to recommending the set-top recording box and its personalized programming service to friends. Faithful users are important to any subscriber-based service, since they represent monthly revenue streams -- ideally, in perpetuity. 

Warts? Profitability is still years away. While armed with patents, they don't appear significant enough to hold off existing competition -- and any time you have Microsoft as a rival, no head start is wide enough.

Helen of Troy (Nasdaq: HELE) -- $9.45 -- Who says vanity kills? Helen of Troy is doing just fine providing beauty and health products to the image-conscious. In its last fiscal year, which ended February, the company saw sales and earnings grow by 21% and 32%, respectively. Its line of personal care products, which include everything from hair dryers to foot and body massagers, have proven to be "defensive" staples, immune from poor business trends elsewhere.

The company was able to improve net profits by commanding slightly higher gross margins and reducing corporate overhead. This year, Helen of Troy expects margins to improve even further. While sales should top the $400 million mark with 10-15% growth, the company is looking at profits of between $0.75 and $0.83 a share. That's at least 25% in earnings growth. Value buffs, stick around: The company is selling for less than its trailing sales and a healthy 11-12 times cash flow. It's also been a major repurchaser of its own stock over the past year. Anyway you look at it, Helen of Troy is sitting pretty.

Warts? Not too many sore spots here, though many of the company's best-selling products are appliances licensed under the Revlon, Vidal Sasson, and Sunbeam names. It'd be nice to see the family grow out its proprietary lines a bit more.

FTD.com (Nasdaq: EFTD) -- $6.17 -- Roses are red/E-commerce is blue/FTD.com is profitable/How about you? By now, most investors know there are things that will and won't work in online retail. Bulky pet food or marshmallow moonpies? Sorry, Pets.com and Webvan, that won't cut it. But goods and services normally transacted by telephone -- like travel bookings or flower arrangement deliveries -- have been dot-com paydirt.

Taking lean infrastructure and making it leaner has been the hallmark of successful Net translations. Cozy online convenience has been a bonus. FTD.com has produced consistent quarterly profits since last summer. Through the first three quarters of fiscal year 2001, ended in June, revenues grew by 39%. The debt-free company is also a beneficiary of the online advertising market meltdown by getting more marketing bang for its online dollar. Providing same-day floral and gift gratification the FTD way, FTD.com is a rare success story buried in a troubled e-tail sector.

Warts? While scalability is not a problem, asset-skimpy FTD has just $22 million in cash if it should decide to tap into new growth ventures. FTD parent IOS Brand owns 98% of FTD.com, giving the company about as much float as a month-old care package of Mylar balloons. In other words, this is a volatility alert: It won't take much to rock the stock higher or lower. 

Oil States International (NYSE: OIS) -- $9.65 -- Jed Clampett isn't the only one who struck it rich by striking oil. Specializing in offshore products, tubular services, and well site services, Oil Services is in the right sector at the right time. While energy stocks appear to be the flavor of the month, this deepwater drill sergeant has been at it since 1949. After blowing away last quarter's estimate by 63%, the targets keep rising. Estimates are calling for Oil States to earn $0.87 a share this year and $1.03 in 2002.

Warts? Like other commodities, energy stocks are cyclical. They climb high. They crash harder. While the company's attractive valuation relative to its peers will help it hold up better than the pack, when the sector is out of favor it's really out of favor.

Hollywood Entertainment (Nasdaq: HLYW) -- $9.35 -- Who could've imagined that video rentals would be a growth industry? Left for dead in the wake of video-on-demand promises and in-home convenience, it looked like curtains for the chain second only to Blockbuster (NYSE: BBI) in size. But like a campy zombie B-movie, Hollywood would not die without a fight.

It ditched its money-losing Reel.com online subsidiary, and is now the lucky recipient of cash-strapped families spending more time at home than they would probably like. This is one niche where the surprises have been on the upside. Early into the second quarter, the company predicted that same-store sales would fall by 4% to 5%. Last week, the company reported that comps actually grew during the period. That prompted the lone analyst putting out estimates on the company to raise the bar from $0.28 a share this year to $0.91 for the 2002 fiscal year.

Warts? Because of Reel.com and past video industry woes, this will be the first full year of profitability for Hollywood since 1997. The company is also debt-rich and cash-poor. The solitary analyst might be a plus or a minus, but it does make the estimates seem less reliable given the lack of perspective variety.

Telefonica Moviles (NYSE: TEM) -- $6.50 -- Remember the great wireless revolution? Don't you miss it? As the cell phone arm of Spain's Telefonica (NYSE: TEF), Moviles thrived on serving the country's growing wireless needs. Even better, the company followed its parent's lead by carving out pieces of the South American market with even more untapped potential. The results were astonishing. From 1996 through the end of last year, revenues went from $1.3 billion to $5.5 billion. Earnings went from $100 million to $643 million during that four-year span. The good times continued through this year's first quarter with the top and bottom line growing 18% and 68%, respectively.

Warts? As American Depositary Shares, whose underlying stock trades in euros, one has to factor in both global and currency risk here. While Stateside Moviles trading is light, there are just over four billion shares outstanding. Moviles is also one of the world's 10 largest wireless operators. It won't be able to shield itself completely against the industry's recent slide out of favor.

ESS Technology (Nasdaq: ESST) -- $8.34 -- It's feast and famine time for ESS. As a provider of DVD and multimedia chips and equipment, ESS is riding the wave of the DVD revolution while suffering through the slowdown in the PC audio and modem markets. However, strength in the DVD market -- one in which ESS is winning market share even as the pie itself is growing -- has more than offset the weakness in its other gadgetry. The company expects to report that June-quarter sales rose by 27% later this month. While earnings have taken a hit, Wall Street is looking for them to bounce back from $0.50 a share this year to $0.96 in 2002.

Warts? Debt-free but not exactly problem-free. Might continued recessionary pressure eventually take its toll on the hot DVD market? The company is also looking to introduce some new MP3 products later this year, but has the post-Napster world cooled on the medium?

World Acceptance (Nasdaq: WRLD) -- $8.70 -- Need a loan? You're not alone. With consumers overextending their borrowing habits at a time when the economy is blinking amber, World Acceptance is there to cash in on the spread. With 424 offices in 10 states to dole out small consumer loans, World Acceptance has been a willing rider in the financing boom sparked by falling interest rates and overambitious spending when prudence would have paid off better.

The company trounced earning projections last quarter, netting $0.38 a share when the Street was looking for $0.31. The company has another shot at besting estimates when it reports again next week. With momentum and lending dynamics providing a comfy tailwind, topping a buck a share in earnings for the fiscal year is realistic. Selling for less than five times free cash flow, World Acceptance is a bargain even among fellow bargains in the financial services industry.

Warts? There's a fine line between consumer demand and outright defaults. Yes, like most financial institutions, World Acceptance knows how to work the models to compensate for credit risks, but no trend lasts forever. And interest rates can't fall forever.

Sirius Satellite Radio (Nasdaq: SIRI) -- $8.39 -- Is the future of radio up in space? Promising coast-to-coast coverage of nearly 100 crystal-clear digital channels of music, news and entertainment, is satellite radio the next big wave? If so, only two companies will have the market to themselves for some time, as Sirius and XM Satellite Radio (Nasdaq: XMSR) already have their satellites rocking in geostationary orbit. While both were expected to come up with equal market stakes, XM has the early lead and now Sirius will probably be looking at no more than 40% of the initial satellite radio market. No worries. New Ford (NYSE: F), Daimler-Chrysler (NYSE: DCX), and BMW cars will be sold Sirius-ready, and if satellite radio takes off like satellite television has, there will be plenty to eat at the trough. 

Warts? Sales to date: nil. Rolling out a new product carries the risk of consumer non-acceptance. While Sirius has over $500 million in cash, it owes even more in long-term debt and massive losses will continue in the early years.

So, there you have it. It's an imperfect 10, but there's still plenty to window-shop over at the five-and-dime.

Rick Aristotle Munarriz has 10 good reasons to look into these 10 stocks a bit further, but he doesn't own a single one. He does own shares of XM Satellite Radio, and you can see his other holdings online, along with the Fool's disclosure policy.