5 More High-Star, Low-Priced Stocks

Whether it's through technical analysis, blindly following the advice of talking heads, or rapid-fire day trading, investors often take precarious shortcuts to generate investment gains. Of course, another one of the more popular shortcuts is looking for low-priced stocks under the assumption that they could "pop" at any moment.

But over the long run, single-digit stocks earn their investment returns exactly the same way other stocks do -- based on fundamentals.

This fascination with low-priced stocks probably has to do with the following:

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. (To learn more about the harmful effects of Cheap-osis, please click here.)

Through the use of splits and reverse splits, management can make the price of its shares literally anything they want. That's the reason companies such as Fairfax Financial (NYSE:FFH) 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 intelligence database, we'll screen for stocks trading under $10 which 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 5-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, Consumer Portfolio Services and Napco Security Systems, might be worth some of your own Foolish due diligence.

Have your portfolio serviced
Irvine-based Consumer Portfolio Services, a consumer finance company, is a favorite low-priced stock in our CAPS community. The company specializes in buying up installment purchase contracts from motor vehicle dealers, and then providing indirect financing to sub-prime customers. In other words, they buy, sell, and service relatively "risky" auto loans.

Along with AmeriCredit and Credit Acceptance, Consumer Portfolio remains one of the few independent auto finance companies which trade publicly. The company attributes their longevity to many factors, including opportunistic acquisitions, a unique collection approach, and economies of scale. Obviously, these are no small claims for a low-priced stock.

The general sentiment in CAPS is that the small-cap nature of the stock, coupled with a seemingly attractive valuation, make the company a strong investment candidate. In addition, CEO Charles Bradley and his management team are thought to have the experience, discipline, and ability to purchase high-return contracts well into the future.

Taken all together, Consumer Portfolio seems pretty deserving of its five-star rating. CAPS All-Star Geek450 sums up the investment thesis in six words, "Great management, great market ... silly valuation!"

Low-priced stock with some security
Napco Security Systems, a manufacturer of security products, is another low-riding stock that looks like an attractive risk/reward proposition. Last September, investors watched in horror as shares of this Amityville-based company plummeted over 40% on lower than expected earnings. However, the general feeling in our CAPS community is that the haircut has provided a bargain opportunity for investors.

Though Napco is a low-priced stock, it's definitely got some big plans for 2007. CEO Richard Soloway expects sales to improve dramatically as newly introduced products -- the NAPCO Freedom 64 and the VIP Gateway 64 -- begin to gain headway. Also, management is confident that their existing product lines, such as ADT Safewatch, will remain strong during the year.

More importantly for Fools, though, is that it might just be another low-priced, five-star stock that soon sees the double-digit big time. LovinMe is just one of many CAPS players who has high hopes for this low-priced stock:

"Small EBITDA, small net, small P/E, small PEG. I love these little guys, especially when they have potential to grow. Although security systems is by no means exciting and this is definitely not for a day trader, it is in line to outperform in the following years."

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 also make great investments.

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.

See you next week, Fools. Until then, keep on gazing at the high stars.

Foolish contributor Brian Pacampara inhales large doses of 10-K's to prevent Cheap-osis and holds no position in any of companies mentioned. The Fool's disclosure policy has never called in sick.