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, due to the numerous risks that low-priced stocks carry, these mega-multi-bagger returns don't occur as frequently as one would hope.

Price means nothing
Here at the Fool, we do our darnedest to diagnose and prevent 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, attractive or unattractive, a winner or a loser.

Through the use of splits and reverse splits, management can make the price of a company's shares literally anything they want. That's the reason a $100 stock like Nike (NYSE:NKE) might very well offer a great opportunity, while most penny stocks are too risky to buy at any price.

For us Fools, price is nothing and thirst (OK, business valuation) is everything.

Your weekly dose of sweet 'n' low
Sadly, though, some incidents of cheap-osis will never be cured completely. So, with the help of our Motley Fool CAPS intelligence database, we'll screen for stocks trading at less than $10 which also have enough investment merit to earn a CAPS rating of four or five stars (out of five).

Thus, without further ado:

Company

Price (as of 03/23 close)

Industry

Basin Water (NASDAQ:BWTR)

$7.61

Utilities

Grey Wolf (AMEX:GW)

$6.81

Oil and Gas Drilling

Theragenics (NYSE:TGX)

$5.50

Medical Equipment

Nevsun Resources (AMEX:NSU)

$2.19

Gold

MRV Communications (NASDAQ:MRVC)

$3.72

Semiconductor



As always, don't view these stocks as formal recommendations, but rather as ideas you may want to research further. With that said, Basin Water and Grey Wolf might be worth some of your own Foolish due diligence.

Bargain-basin price
Liquidity risk is often a concern with low-priced stocks, but Basin Water deals with risky liquids of a completely different sort -- contaminated groundwater. Through its "next-generation" ion exchange system, Basin Water removes nasty pollutants to non-detectable levels.

As the government stiffens regulations on the extraction of groundwater, Basin Water should stand to benefit from this supply shortage of sorts. Combine this with the fact that contaminant levels are rapidly on the rise, and you have a small-priced stock with some pretty big tailwinds at its back. To date, the company has installed treatment capacity of more than 80 million gallons per day, supplying safe swigs of H2O to hundreds of thousands of residents -- primarily in the western United States.

Shares are down more than 50% since the IPO debuted last May, but with a cash position of nearly $60 million, negligible debt, and favorable trends working its favor, Basin's waters might be clear enough to take a sip.

These CAPS All-Stars help us get our feet wet:

  • TMFMmbop (the Fool's own Tim Hanson): "Well, maybe I called this a day too soon. That said, this company's water purification products (installed at the wellhead) seem like they could gain a foothold given the massive investment in water infrastructure that's both need in our country and coming down the pipeline (sorry, couldn't resist the pun) ... I could be early to the story here, but I think it's a story worth watching."
  • wolfhounds: "Water ... water ... everywhere and not a drop to drink keep echoing in my head. The world is about to run low on its clean water supplies and this company is sitting in a position to skyrocket on that theme."

Wolf in cheap's clothing
Grey Wolf, a Houston-based drilling company, is another low-priced stock for which our CAPS players have high expectations. With a fleet of 118 premium rigs and operations in some of the most potent natural gas markets -- including the Gulf Coast and South Texas -- it's not too hard to see why.

In the most recent quarter, Grey Wolf's net income surged 38%, while revenue rose 18%. The company also produced $288 million in operating cash flow and ended the year with $230 million in cash on the balance sheet. As improvements in the level of drilling continue to increase, Grey Wolf should only benefit from the long-term trend of rising day rates. Even Little Red Riding Hood would have no trouble picking this one out.

Currently, the company trades at a P/E of 7 and a PEG of 0.75, indicating the wolf is reasonably priced and has plenty of room left to hunt. For example, these two CAPS All-Stars drill right to the heart of Grey's matter:

  • slbutton: "Let's look at some numbers: ROE of 48%; shares are trading at a little over twice book value with diluted EPS of nearly $1. On the fuzzy, non-quantitative end of things, I like the fact they're using refurbished rigs -- I like management to have a fiercely cheapskate mentality."
  • stephenjpauls: "Long-term, I think GW will continue to grow and should see big gains by Q4 2007. Some have speculated that GW is ripe to be purchased by a larger company. The company continues to maintain, improve, and add bigger/better rigs to keep competitive."

The Foolish conclusion
Despite our Foolish attempts to educate the investment public about 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. It's 100% free -- the lowest price you'll find anywhere.

For more CAPS-related Foolishness:

Think you can pitch your favorite stock -- or ditch your least favorite one -- in 27 seconds or less? That's just what we're doing over at Motley Fool CAPS! Head on over to check out our new 27-second stock pitches.

Foolish contributor Brian Pacampara swallows a couple of 8-Ks each week to prevent cheap-osis and holds no position in any of the companies mentioned. The Fool's disclosure policy is always in tip-top shape.