FOOL ON THE HILL
Ten Under $10 in 2002

After a successful shot at mining for gems in the low-priced stock minefield last year, Rick Munarriz gives it another go. Risks. Rewards. Volatility. It's all there for the picking beneath the radar when analyst coverage is minimal. Just remember to send the canary in first.

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By Rick Aristotle Munarriz (TMF Edible)
April 8, 2002

Call me Ahab. Last summer, I was trolling for value in stocks priced between $5 and $10 a share. It's purgatory for equities, chock full of companies that are too good for penny-stock hell yet not seasoned enough to cut it in Wall Street's promised land. That fishing trip worked out well. The average gain of the 10 stocks I singled out was 19.5% through Friday, with a few finding their share price graduating into double digits. That's well ahead of a rudderless market that found the Nasdaq Composite shedding 10.2% of its worth in that time while the S&P 500 slumped 4.9% lower. (See the table at the end of this column for a full rundown on the performance of the original 10 Under $10.)

So, inspired by our latest online seminar devoted to the lucrative art of panning for gold through the use of stock screens, I figured it was a good time to bait the old hook and see what tugs at the line this time. Screens are helpful because not only can one specify price ranges, but one can also filter out those stocks that got into this tweener La La Land due to deteriorating fundamentals. Now, before we head out, I guess I should pass out some Dramamine. There be swells ahead, matey. Some stocks were never meant to be uncovered and the risks run deep in these waters. That said, anchors aweigh and away we go.

Fargo Electronics (Nasdaq: FRGO) -- $9.08  -- Anyone who claims that the market is perpetually efficient has never driven through Fargo. Logic took a detour two weeks ago when Fargo called off its merger with Zebra Technologies (Nasdaq: ZBRA). The companies mutually called off the pairing after nearly eight months of nuptials once they realized that the Federal Trade Commission was unlikely to approve the deal on antitrust grounds. In that time, it was easy to see why analysts stopped following tiny and contractually tight-lipped Fargo. But investors did, too. The stock was trading at a huge discount to the $7.25 a share buyout price, so even the arbs had given up on the merger.

Once unshackled, Fargo was free to look ahead publicly and it was a sight to behold. The company revealed that after earning $0.34 a share last year, it was on track to deliver earnings between $0.50 and $0.65 a share this year and $1.20 a stub come 2003. But, get this, despite the huge projected growth, the stock fell down to nearly $6 the day the merger broke down -- or five times next year's profit target. The news finally sunk in, as the stock soared last week. But business is clearly booming for Fargo, which makes printing devices for plastic identification cards. From heightened security measures spurring corporate demand to hotels and transportation companies making the transition to keycards and plastic ticketing, Fargo seems well positioned up North.

Williams Industries (Nasdaq: WMSI) -- $6.69 -- You've probably heard about the boom in the construction industry. With cheap borrowing rates turning suburbanites into rabid homehunters, the housing sector has been thriving. But, honestly now, with interest rates likely to head higher in the months to come, maybe the better opportunity lies in the unloved industrial construction niche. After all, it's once the economy gets back on its feet that cities feel freer to spend on things like ramping up structural work on neglected projects and updating steel bridge girders. That's Williams' sweet spot and it hasn't been doing too shabby despite the market's neglect.

Through the first half of its fiscal year, revenues and earnings have clocked in higher and the company is now closing in on its seasonal peak period. With a growing backlog of orders, it's hard to imagine why the only analyst with a figure out there is expecting the company to earn just $0.63 a share this year. It had earned $0.70 a share last year and the company has seen its operating profits climb during each of the past three years. It's off to a strong start in fiscal 2002, and -- like building a bridge over troubled waters -- even if all the company is able to muster is $0.63 a share, that's still an attractive valuation at just 11 times earnings as the company comes into its cyclical prime.

DHB Industries (Amex: DHB) -- $6.85 -- We live in a violent world, and DHB has been profiting from it. From bulletproof vests to athletic braces and supports, life is a contact sport for the company that saw its sales climb 40% higher last year with earnings soaring by 69% to $0.28 a share. The lone analyst following the company thinks this is just the beginning, with profits looking to rise 75% this year. Ironically, for a company devoted to providing body armor, DHB is lugging around a good deal of debt. Still, this kind of stellar bottom-line growth rarely goes unrewarded.

Register.com (Nasdaq: RCOM) -- $8.54 -- With 3.3 million domain names under management, Register.com has been more than happy to let companies and individuals stake their claim in cyberspace. It's a lucrative business with annual renewals providing a steady high-margin revenue stream. Not to be confused with the fallen heroes of the dot-com revolution, the company has been producing cash earnings for two years now.

While it has been living dangerously, scooping up troubled money-losing competitors, it has been doing so at fire-sale prices. Besides, the company has quite the cash cushion. Between its greenbacks, short-term investments, and marketable securities the company has liquidity of more than $4 a share. Opportunity.com? Perhaps.

Team Inc. (Amex: TMI) -- $7.15 -- Go Team! Providing industrial services like leak repairs, hot tapping, and field machining might seem like dirty work, but somebody's got to do it. Don't yawn. Yearn. Team is rolling along nicely, with earnings coming in 50% higher through the first three quarters of the company's May fiscal year. This will be the fourth consecutive year of not only sales and earnings growth, but also of more critical gains in margins and market share. How about that for Team spirit?

Quovadx (Nasdaq: QVDX) -- $7.55 -- Quovadx? Its name is a mouthful but the fundamentals for this enterprise software company specializing in the healthcare sector can make any prospective shareholder open wide and say "Ahhh." Cash rich and feasting on high-margin software sales, analysts are looking for the company to earn $0.43 a share this year and $0.72 a share in 2003. Want a second opinion? Bonus. The company has topped Wall Street's estimates for each of the past four quarters.

Sherwood Brands (Amex: SHD) -- $6.00 -- With no relation to the paint people or to Robin Hood's forest, Sherwood's idea of stealing from the rich is strictly that in terms of rich chocolate, cookies, and candies. The modern day Wonka also produces gift baskets and sells its wares at most well-known retail outlets. The downside? That includes Kmart (NYSE: KM), whose delayed order shipments led to a slight dip on the top and bottom line this past quarter. The upside is that Sherwood's forest also includes Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) stocking the company's chocolate bars, toffees, and novelty items.

On the prowl in a fragmented confectionary market and optimistic that organic sales growth will pick up later this year and turn it up another notch in fiscal 2003, the company looks like a steal at just nine times this past year's cash flow. Just don't tell Robin.

ScanSoft (Nasdaq: SSFT) -- $6.45 -- Even in the imaging field, sometimes a change of scenery will do you good. It's been three years since the company shed its Visioneer moniker and bar code scanning business to acquire Xerox's (NYSE: XRX) ScanSoft digital imaging services. Since then, revenues have clocked in at $31.6 million, $49.1 million, and $63.9 million over the last three years, respectively. In February, the company announced that it was looking at sales of $105 million this year. While profits have been iffy as the company keeps up with industry demand, it is expecting to earn at least $0.24 a share this year with the lone analyst tracking the company looking at net income of $0.33 a share next year. A stock with a view?

Educational Development (Nasdaq: EDUC) -- $7.15 -- Taking the Tupperware (NYSE: TUP) associate model to the treatment of children's books, Educational Development has been working its way towards a happy ending. As the exclusive stateside distributor of the Usborne book line, while the company has been steady at retail distribution, the surge in its selling through creative outlets by empowered sales reps has really led the way here. Last year, sales grew by 17%, accelerating nicely in the final quarter. Earnings came in at $0.38 a share, 40% higher than the previous year. Momentum, backed by parents who seem to spare no expense when their kids are involved, bodes well for Educational Development.

meVC (NYSE: MVC) -- $9.65 --  Talk about your bad timing. When Draper Fisher Jurveston rolled out its venture capital fund two years ago at twice today's going price, it came just as tech stocks were peaking. Banking on upstarts has proven akin to playing with matches at a bean factory. Thankfully, meVC has squandered slowly. It still has most of its assets liquid, to the tune of $9.64 a share in short-term money market instruments. Heck, that's basically what the stock is trading for right now. Tack on the punished portfolio of dubious venture capital investments and the fund's net asset value is perched at $14. With angry shareowners looking for reform, fund closure, or new advisors, change is afoot at meVC. Along the way, investors buying now have the luxury of getting in at the price of cash on hand, with the portfolio stakes serving as potential gravy.

Performance of the Original 10 Stocks Under $10:

                   7/11/01  4/4/02  Return
FTD.com              6.17    5.36   -13.1%
ESS Tech             8.34   19.00   127.8%
Helen of Troy        9.45   14.20    50.3%
Hollywood Ent.       9.35   17.47    86.8%
Oil States Services  9.65   10.00     3.6%
Sirius Satellite     8.39    5.17   -38.4%
Suburban Lodge       7.80    8.63    10.6%
Telefonica Moviles   6.50    6.55     0.8%
TiVo                 6.00    5.00   -16.7%
Worldwide Acceptance 8.70    7.25   -16.7%

Ten Under $10                        19.5%
Nasdaq Composite                    -10.2%
S&P 500                              -4.9%

Rick Aristotle Munarriz can count past 10 but doesn't have the desire to. While he finds these 10 stocks intriguing, he doesn't own a single one. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.