5 More High-Star, Low-Priced Stocks

It's one of the most fundamental facts of life: Little things grow. As long as they're alive and healthy -- be it a small human infant, a baby calf, or a tiny mustard seed -- small packages tend to pack some powerful growth potential.

Unfortunately, not everything that's low to the floor is destined to bloom and grow. Take, for example, the ever-popular low-priced stock. Even though low-priced stocks have irresistible multibagger potential, they're an even a better bet to shrink in size because of the numerous risks they carry.

Nevertheless, the fascination with low-priced stocks probably persists for the following reasons:

1. They're often considered dirt cheap.

2. They're linked with turnaround situations.

3. They're 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. That's the reason a company like Student Loan (NYSE:STU) -- whose shares are priced well above $100 -- might very well be a bargain, 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, some cases of cheap-osis will never be cured completely, but others can be treated with the proper information. 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 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.

With that said, two stocks on the list, Omnova Solutions and Xanser, might be worth some of your own Foolish due diligence.

Nova in the high-star sky
Omnova Solutions, a leading company in specialty chemicals, is small-priced stock that's steadily gaining large support from our CAPS community. Although the Ohio-based company's custom-made chemical formulas, latex, and polymers are about as boring as it gets, their products are used to coat many of the things we utilize on an everyday basis -- such as paperboard, magazines, brochures, and even on carpet backings to make those fuzzy fibers stick.

Despite more than doubling its third-quarter income, Omnova's stock plunged more than 25% last September, when the company failed to meet Wall Street's revenue expectations. The panic over on Wall Street was because record-high input costs and weakness in the residential carpet industry would continue well into 2007, thus hampering Omnova's mid-term profit outlook. The shares have since recovered from those September losses, and there are a few good signs as to why the gains should persist.

For one, Baupost Group, led by famed value investor Seth Klarman, owns nearly one-fifth of the company. As an investor bent on minimizing the degree and likelihood of losses, I think Klarman's stake says a lot about Omnova's risk/reward profile. Moreover, Omnova recently reported the sale of their building products segment, while three of their remaining core businesses showed drastic improvement -- suggesting that management is taking strides to focus only on worthwhile operations.

CAPS player ezn1 sums up the investment thesis in seven words, "Low price, acceptable risk; good recent financials."

Xanser doesn't like IT
Xanser, a provider of engineering solutions, is another low-riding stock that looks like an attractive risk/reward proposition. The Dallas-based company had a rough time in late 2006, as a third-quarter loss (filled with one-time restructuring expenses) sent its shares spiraling over 15% from its 52-week highs.

However, January has been a lot kinder to Xanser investors, as the stock has bounced back on reports of heavy insider activity and favorable news regarding the company's restructuring efforts. So, when you combine interesting insider moves with the ever-growing bullish support from our CAPS community, I'd say that's reason enough to at least take a closer at what Xanser has in the works.

For example, CEO John Barnes' decision in late 2006 to gradually phase out the IT business -- also known as Xtria -- is a huge positive for shareholders. For the past few years, management's pursuit of new health-care contracts through Xtria has been a major drag on the company's operations. On the other hand, the company's technical services segment, Furmanite, has been Xanser's primary source of revenue growth and accounts for nearly 90% of total sales.

Similar to the steps that Omnova Solutions is taking, I always like to see companies that are willing to cut off unprofitable segments in order to focus on their core strengths and advantages. For now, at least, it looks as though Xanser is making the smart move.

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.

Foolish contributor Brian Pacampara swallows two 10-Qs every day to prevent cheap-osis and holds no position in any of the stocks mentioned. The Fool's disclosure policy is always in great condition.