5 More High-Star, Low-Priced Stocks

As investors read, think, and strategize about how to earn high returns in 2007, buying stocks for less than $10 remains one of the "lowest" -- but most tempting -- forms of investing out there.

After all, nothing trounces Mr. Market quite like a $2 stock that moves into double digits over just a short period of time. Unfortunately, this doesn't happen as frequently as one might hope.

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 a stock 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 Alleghany (NYSE:Y) and Washington Post (NYSE:WPO) -- whose shares are priced well above $100 -- might very well be bargains, while most penny stocks are too risky to buy at any price. 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:

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, Northgate Minerals and Gerdau AmeriSteel, might be worth some of your own Foolish due diligence.

Could this stock really be a gold mine?
Canadian-based Northgate Minerals, a copper- and gold-mining company, is a widely favored low-priced stock in our CAPS community. The company's main assets include the Kemess North deposit in British Columbia with mineral reserves of more than 4 million ounces, and the Young-Davidson property in Northern Ontario, which, according to the company, "has the potential to produce 150,000 ounces of gold per year for a decade."

The general sentiment in CAPS is that unprecedented global demand for gold and copper should benefit Northgate significantly. In addition, CEO Kenneth Stowe and his management team are thought to have enough talent (and hedging smarts) to keep the company profitable regardless of how mineral prices react -- no small feat for a small-priced stock.

With favorable industry winds, promising properties, and a proven management team, Northgate seems pretty deserving of its five-star rating.

CAPS player NetscribeBasMtrl sees good things for Northgate in the new year:

"As the corporation moves forward into 2007 and beyond, a low debt component together with the culture of operational excellence provides a solid foundation for growth in pursuit of the company's vision of becoming a larger, multi-mine gold producer."

A low-priced steel
Gerdau AmeriSteel is another low-riding stock that looks like an attractive risk/reward proposition. In early November, the Tampa-based steel producer reported an impressive third quarter as net income grew 54% year over year -- fueled primarily by higher steel prices and increased production from its mills.

Though Ameristeel is a low-priced stock, it's definitely no small operation. AmeriSteel is the fourth-largest steel company in North America and the second largest mini-mill steel producer behind only Nucor. Mini-mills are more commonly referred to as "scrap iron" producers, and AmeriSteel uses a scrappy strategy that should be familiar to Foolish value investors.

CEO Mario Longhi and his management team attempt to acquire underperforming steel operations that are available at bargain-basement, discount prices. AmeriSteel has the financial flexibility and leadership to turn these operations around primarily because it's an indirect subsidiary of one of the most profitable steel companies in the world -- Brazillian Gerdau S.A.

More importantly for Fools, though, is that it might just be a low-priced, five-star stock that soon sees the double-digit big time.

CAPS participant obiwankenobe1250 is just one of many who has high hopes for this low-priced stock:

"Based solely on fundamentals. Stock price is near a high, yet construction in the commercial sector remains strong. I like the fact that they make things like super light steel beams. Appear to have a wide customer base because of a wide variety of products. Low P/E, low P/B, decent ROA & ROE".

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.

Time's running out on the 2006 Foolanthropy charity drive. Five charities are competing for donations, with the one raising the most money by Jan. 7 earning an additional $10,000 from the Fool. Please consider giving to these worthy causes, and thanks for your support.

Fool contributor Brian Pacampara discounts dividends to prevent cheap-osis and holds no position in any of companies mentioned. The Fool's disclosure policy is always incredibly healthy.