It's hard not be tempted by low-priced stocks. Psychologically, any number that's a stone's throw away from zero naturally indicates to us that the bottom should be nearby. After all, it's even easier to fathom a stock quadrupling from $2 to $8 than one doubling from $50,000 to $100,000 (a la Berkshire Hathaway). Unfortunately, these multibagger returns don't happen as frequently as one might hope, because of the numerous risks that low-priced stocks carry.

Nevertheless, the fascination for low-priced stocks probably persists because:

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 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.

Through the use of splits and reverse splits, management can make the price of its company's shares literally anything it wants. That's the reason a $100 stock like Entergy (NYSE:ETR) 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, 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 that also have enough investment merit to earn a CAPS rating of five stars -- the highest score a stock can receive.

So, without further ado:


Price (as of 02/26 close)

Immersion (NASDAQ:IMMR)








Rio Narcea Gold Mines (AMEX:RNO)


As always, don't view these stocks as formal recommendations, but rather as ideas you may want to research further. With that said, here's one low-baller straight from my backyard that might be worth your own Foolish due diligence.

Hometown hero
I just had to feature DRAXIS Health this week. Not because I know the pharmaceutical company cold, but because I pass by the head offices in Mississauga, Ontario, all the time on the way to my friendly neighborhood mega-mall. Legendary investor Peter Lynch wrote that investigating local companies can lead to some of the best investment returns. So, who am I to argue? Although I can't say for certain that I've found a blockbuster in my own backyard, let's just say my digging to date has been interesting.

DRAXIS' strategy is to focus on specialty markets -- like radiopharmaceuticals and freeze-dried injectables -- to develop a sustainable competitive advantage. The key to investing is to own stocks with huge moats, so DRAXIS' quest for one in the lucrative world of pharmaceuticals has also caught the attention of our CAPS community. Judging from the company's latest financial results and developments, our CAPS players might be onto something.

A few weeks ago, DRAXIS reported net income growth of 48% while revenue rose 12% for the year -- both record highs for the company. What I found even more encouraging was that operating cash flow also increased substantially. So, even after a major share repurchase and significant capital spending, DRAXIS ended the year with $21.5 million in cash and no debt. For a low-priced pharmaceutical company in a transition period, those are some pretty healthy numbers.

Radioactive returns
CEO Martin Barkin has been trying to position the company to become less dependent on a collaboration with Pfizer, which in the past accounted for the majority of its licensing profit. As a result, DRAXIS has managed to develop a diversified profit base through its two main businesses: contract manufacturing and radiopharmaceuticals. With these segments, DRAXIS looks to be in a good position to capitalize on several sources of growth, like a global shortage of freeze-dried products and an underpenetrated radioactive market in the U.S. In fact, DRAXIS recently submitted an application to the Food and Drug Administration to prepare a medicine imaging agent called Sestamibi, which is used to evaluate blood flow to the heart.

Of course, I barely passed Bio 101 in college, so I'd probably be the last person to ask about the feasibility of Sestamibi. But given the company's recent operating performance, cash-heavy balance sheet, management's decision to repurchase shares, and not to mention the support it has from many CAPS all-stars, DRAXIS Health is at least worth a closer look.

More importantly for Fools, though, is that this is one low-priced stock that should have a reasonable shot at the double-digit big time.

The Foolish conclusion
Despite our Foolish attempts to educate the investing 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. Within a few minutes, you'll have your own selection of underpenetrated stocks and markets to capitalize on.

For more CAPS-related Foolishness:

Foolish contributor Brian Pacampara likes to do a sum-of-the-parts analysis to prevent cheap-osis and owns shares of Berkshire Hathaway. Berkshire and Pfizer are Motley Fool Inside Value picks. The Fool's disclosure policy always earns a clean bill of health.