5 Low-Priced, High-Star Stocks

Buying stocks simply because they trade 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, because of 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 its shares literally anything it wants. That's the reason a $400 stock like Alleghany (NYSE:Y) might very well be a great opportunity, while most penny stocks are too wild to buy at any price.

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 five stars.

Without further ado:

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

Cross the Ts
The pen may be mightier than the sword, but a small (and growing) contingent in our CAPS community says it can also maul the market. Despite a 20% drop over the last two months, A.T. Cross, a manufacturer of fine writing instruments, recently earned a five-star rating.

In addition to its Cross-branded pens, the 158-year-old company markets premium sunglasses under the Costa Del Mar name. Historically, A.T. Cross' returns on capital have been lackluster, but, at the very least, they've been showing an upward trend over the last several years. In the latest quarter, A.T. Cross even reported a 42% sales increase at Costa Del Mar -- another bullish sign, to be sure.   

Currently, the stock trades at a forward P/E of 17 and an EV/EBITDA of 10.9. Though Fools may not want to pull the trigger just yet, Cross should be kept in the crosshairs.  

CAPS player bluejohnnyd pens this pitch:

This company is pretty strong fundamentally, with lots of cash and little debt. Also, they have been paying back debt over the past three years, while maintaining positive operating cash flow. Seems fairly valued, and the growth prospects are pretty decent.

Bullish surround sounds
SRS Labs, a California-based provider of audio technology, is another low-rider that our community has high hopes for. Like A.T. Cross, SRS investors have had their own taste of low-priced lemonade lately, with the stock down a sour 34% since the beginning of August.

Mr. Market inflicted virtually all of that damage on August 7th, after the company reported lower-than-expected Q2 earnings of $4.7 million. Nevertheless, not a single CAPS All-Star has voiced a bearish opinion about the stock. The positive sentiment regarding SRS centers around its 20 audio entertainment products, which are utilized by the likes of Sony (NYSE:SNE), Microsoft, and Panasonic.

CEO C.K. Yuen expects earnings to be negatively affected in the short term, as SRS continues to place patent protection and royalty enforcement among its top priorities. But with over $38 million in cash and investments, SRS looks financially strong enough to weather any prolonged operating weakness.

CAPS player PartyMDK sounds off:

This company has patented surround sound technology that goes in very popular small devices (like PSP's and iPod docking stations). It routinely beats earnings, seems to be signing new contracts every few weeks, and trades at a PEG around 0.90. I feel like there is something I am missing as to why this stock is beaten up, but until I find it, I'm a buyer.

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.  

Foolish contributor Brian Pacampara swallows a couple of 10Ks each day to prevent cheap-osis and owns no position in any of the companies mentioned. Microsoft is a Motley Fool Inside Value newsletter recommendation. The Fool's disclosure policy is always in tip-top shape.