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.
|Helen of Troy||$9.45||$29.26||210%|
|Oil States Int'l.||$9.65||$13.85||44%|
* Suburban Lodges was acquired in 2002 for a total payout of $9.04 a share.
** FTD.com merged into FTD Incorporated with each share of FTD.com equal to .26 shares in the new company.
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
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.
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.
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
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.
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.
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.
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.