Five Stocks Under $10

I'm cheap!

I'm not sure if that's an embarrassing confession or a proud declaration -- or something in between -- but it's me. If I can't escape it, I might as well embrace it, right?

But being cheap can be costly in the stock market. The same mentality that drives one to load up on penny candy, early bird specials, and yesterday's rolls can backfire if you're scouting stocks at pocket-change prices.

Three years ago, I decided to scour the universe of low-priced stocks. In my Ten Stocks Under $10 column, I avoided all of the penny stocks trading for less than $5 a share, but singled out some interesting companies trading in the single digits. It worked out better than I expected.

While the Standard & Poor's 500 shed 1% of its value in that time, the average stock in the list gained a healthy 66%. The results would have been even better if it wasn't for the fact that one stock was acquired a few months later while another was absorbed into its parent company. Of the eight original stocks that still trade publicly, all but one -- Sirius Satellite Radio (NASDAQ:SIRI) -- are trading in double-digits.

A year later, I pushed my luck and ran with another 10 stocks trading between $5 and $10 a share. This list proved to be a collective yawner as the typical stock gained just 2% while the S&P 500 improved by 3% over the same time.

Yet if you put it all together, the average gain on the 20 stocks has been 34% while the S&P 500 has inched just 1% higher. There is something dynamic about low-priced stocks. It's a forgotten lot for the most part. It's fiscal purgatory, plain and simple. Some of the stocks will graduate into worthy investments while others will flunk out of the equity pool.

In order to delve a little deeper into my selection process this time, I will go over the first five stocks now. Come back next week, and I'll wrap up this year's list with five more selections.

1. TradeStation (NASDAQ:TRAD) -- $8.21 -- This company may be evil incarnate to those who abide by the buy-and-hold mantra. As an electronic platform for day traders, TradeStation boasts that its typical account holder has $119,000 in assets and placed nearly 150 trades this past quarter. Ouch! While the churn may turn your stomach, it has worked out splendidly for TradeStation. As a beneficiary of renewed interest in market speculation, the company saw its earnings climb from just $0.04 a share in 2002 to $0.27 a share last year.

The company is looking to grow pre-tax earnings by about 70% in 2004, with revenues coming in between $72 million and $81 million. Having exhausted its tax-loss carryforwards, it is looking to earn from $0.31 to $0.39 a share this year. While the company may not appear to be much of a bargain, trading at nearly five times projected revenues and better than 20 times this year's earnings, the company's growth momentum is as impressive as its cash-rich and debt-free balance sheet is lean.

2. Radica Games (NASDAQ:RADA) -- $9.18-- You've got to hand it to Radica. Literally. The electronic handheld game specialist may have announced mixed results for 2003 this week, but it's doing a lot of things right. Yes, revenues dipped by 16% last year. Yes, the $0.66 a share it posted in earnings is inflated by a favorable charge.

However, the company sports a debt-free balance sheet with more than $2 a share in cash. It also has some intriguing catalysts for growth in 2004. With the recent wave of casino popularity, you've got to love Radica's lighted poker, slot, and blackjack handheld games.

The company also is moving into new, potentially lucrative areas. Not only is it rolling out its first entry in the remote-control car market, but it's also following LeapFrog's (NYSE:LF) lead by diving into the educational electronic toy market with its Twinkleberries School product line.

It is also teaming up with Sega and Taito to produce Play TV games -- the latest wave of cheap video gaming where you just plug the controller into your television set and you're back in retro arcade heaven -- based on Sonic the Hedgehog, Tetris, and Space Invaders. Radica's slate looks like it will be geared to play in the year ahead.

3. RealNetworks (NASDAQ:RNWK) -- $6.02 -- RealNetworks has been making headlines this week. Microsoft (NASDAQ:MSFT) and the European Union may settle on a deal that involves Mr. Softy installing RealNetworks' RealPlayer in new Windows installations (or at the very least provide it on a CD). However, that would simply be gravy to a company that is riding the wave of digital distribution.

Yes, Apple (NASDAQ:AAPL) gets all the loving for its iTunes success, but Real's Rhapsody service has seen its number of paying subscribers grow to 350,000, and it grew its digital music business this past quarter by 71% -- sequentially! The company continues to join forces with blue-chip partners, and it gobbled up online developer Gamehouse to fortify its offerings.

While the company posted a small loss last year, it did so on growing sales and is looking to return to profitability later this year. Like Radica, RealNetworks also has a clean balance sheet with more than $2 a share in cash. This kind of cushion is always welcome with a stock so close to the $5 perch.

4. ILX Resorts (AMEX:ILX) -- $7.50 -- Time-share is no longer an ugly word. ILX can tell you that selling weekly vacation ownership interests in exotic destinations has blossomed into legitimacy, and it has nine established resorts out West that it would love to pitch your way. It's also sitting on an attractive 44-acre parcel of land with development rights just a mile off the celebrated Las Vegas Strip.

The company earned $0.91 a share from continuing operations last year on an 11% uptick in sales. While the company's move to scale back expenses in 2004 may seem to indicate an expected downturn, don't check out so quickly. With a $0.105-per-share quarterly dividend, investors will be paid to be patient since the stock with a budget-minded P/E multiple of 8 yields a 5.2% payout. An improving economy may reward investors sooner rather than later.

While ILX does have a class action lawsuit aimed its way that alleges overbooking, the company should merit a higher share price if it is able to rise above it.

5. Switchboard (NASDAQ:SWBD) -- $5.91 -- In one of our many active discussion boards, this company would be considered a potential Green Gene stock. Half of its market cap is backed by the company's cash hoard of nearly $3 a share. While trading so close to its liquidity may be the hallmark of a damaged company that Wall Street considers nearly worthless, this isn't the case with Switchboard.

The online directory specialist posted a profit of $0.10 a share last year as net revenues soared by 30% to hit $15.2 million. Yes, it's a small absolute amount, but Switchboard is small. Back out the company's $56 million in cash, and the company's enterprise value is trading at just four times last year's revenues. With affordable paid searches jump-starting the online revolution, Switchboard is a natural to rake in the portal benefits on both local and national levels. It is, after all, the switchboard operator.

I'd lend you the quarter to call someone about it, but it's like I told you before -- I'm cheap.

Tune back in next week for five more stocks between $5 and $10. And for undervalued and underfollowed stocks trading at all kinds of prices, check out Motley Fool Hidden Gems.

Rick Aristotle Munarriz remembers hating the "To Be Continued" cliffhangers, but hopes you will come back next week for five more stocks packing bargain-basement potential. He does own shares in RealNetworks. Rick's other stock holdings can be viewed online, as can the Fool's disclosure policy.