I have always loved Christmas stockings. Long after you've picked dry all of the gift-wrapped goodies under the tree there was a usually a small token present or two swinging away on the stocking hook.
Granted, it was rarely something costly. Often it was just a cheap trinket that proved to be too tempting to resist as an impulse item by the checkout register. However, with so little invested in the stocking stuffer, the upside seemed unlimited.
Maybe that's why I have often taken a shine to low-priced stocks. I don't mean the penny stock muck. When I have profiled my annual Stocks Under $10 lists -- and hang in there because January will be here sooner than you think -- I stick to companies that trade in the high single-digits and have a rich balance sheet, healthy profits, or a spectacular story to tell. If I can find all three qualities in the same company, you'll usually find me purring away in the corner, but I'll settle for two out of three if I have to. After all, companies don't trade in the single-digits without a good reason. They are either fallen or forgotten and that is usually not by accident.
So to get in the holiday spirit, I figured I would seek out some low-priced stocks ripe for wrapping in decorative ribbons and heaving into a stocking. These four companies pass some of the smell tests, but not all. One could argue that if they were perfect, they would have appreciated well into the double-digits. So like that seemingly affordable novelty dangling before you, recognize that sometimes you will get what you pay for when you dabble in this risky universe of low-priced stocks. Put in some due diligence on your own and see how these potential presents pan out.
Register.com (NASDAQ:RCOM). There was a time when Register.com and Network Solutions owned the domain marketplace. When prime dot-com real estate was there to be claimed in the 1990s, folks had no problem paying $30 or $35 a year to own a potentially valuable domain name. But even before the dot-com bubble burst, sending the domain resale market into a tailspin, other registration sites emerged, offering discounted virtual homesteads with even more consumer services.
So these days it may be hard to look at what Register.com has become. Domain names were supposed to be an annuity, with annual renewals trickling in and new registrations on top of that. Yet cheaper alternatives and the drying up of the speculative land rush now find the company renewing just three of every five registered domain names. Yet Register.com is still a consistent producer of free cash flow. While revenues have been flat, it has produced profits during three of the past four quarters. It has also licked its problem with credit card company chargebacks that once threatened to knock it down hard.
Just as important, the company's balance sheet sports just over $4 a share in cash, short-term investments, and marketable securities. Yes, that means that you are buying a recognized and profitable domain registration specialist for just a few bucks over its balance sheet greenery. With 82% of its revenues still coming from its overpriced domain name registrations, there is ample room for the company to diversify by cutting prices to grow its audience. That would make its customers more receptive to the company's growing slate of value-added services as well as the potential of advertising in an age in which paid search loves to cuddle with high traffic destinations.
Webzen (NASDAQ:WZEN). There are few sectors sexier than online gaming in Asia. But now picture a rotund senior senator in a Speedo or your grandmother in a thong. Suddenly sexy became sexless, right? That's the problem with Webzen. As a Korean maker of Asian online games, the company was toiling away in the right niche before online gaming -- most notably in China -- was cool. In fact, 44% of the company's revenues this past quarter came from Chinese gamers, so one can say that it was doing the right thing at the right time at the right place. When you see an explosive company like market leader Shanda (NASDAQ:SNDA) take off, it's only natural to see where the other promising players are -- given the region's untapped potential.
Webzen made it to the cool pool, only now it's breaking into the doggie paddle. While others like Shanda are seeing their business booming, Webzen's online franchise is faltering. This past quarter it had 189,000 peak concurrent users playing its online game in China. Three quarters earlier that number topped out at more than 310,000. Contrast that to the drool-inducing 1.7 million (and growing) users that Shanda has had playing at the same time. While the company has been growing in the Philippines and Taiwan it has suffered sequential double-digit revenue dips in its core markets of China, Korea, Thailand, and Japan.
In sum, this past quarter saw revenues fall by 13%, with profits stumbling by 35%. Yet the company is still profitable -- with respectable margins and with a cash-rich balance sheet that is drastically discounting the possibility that Webzen is able to shore up its online offerings to the point of growing again in a market with years of explosive upside.
Autobytel (NASDAQ:ABTLE). If you have ever dealt with a pushy car dealer, then perhaps you may appreciate Autobytel. Through its network of sites, the company is the leading online seller of cars. This year it will have helped close the deal on 8% of all domestic car sales -- a thick $40 billion slice in the massive big-ticket pie.
The company is profitable, though financial restatements, fending off lawsuits related to those restatements, and other compliance overhead issues threaten to dim the bottom-line prospects in the near term. However, traffic continues to grow as the company expects to generate revenue between $120 and $125 million this year while topping $150 million come 2005.
I spoke to the company's CEO earlier this week so perhaps a more in-depth look at this potential Rule Breaker may be in order. The point is that while the stock is trading at a third of its highs earlier this year, the company's fundamentals -- and more importantly its potential -- have been gravely discounted by the market. The battery's not dead -- it's just waiting for the key to trigger the ignition.
NetManage (NASDAQ:NETM). It's easy to see why enterprise software companies have had a rough go over the past few years, especially Internet enablers like NetManage, as companies have scaled back their IT spending. Yet that tide is turning and NetManage should be there to ride it out. In fact, after a few sluggish periods, the company finally posted year-over-year growth during its September quarter. It also managed to land the year in the black with a $0.09 per share quarterly profit.
This was one that was discovered last month by members of our Green Gene discussion board where value investors seek out attractive companies that are trading for not a whole lot more than their balance sheet liquidity. With $2.82 in cash per share, NetManage is a profitable Green Gene ready to grow its financials again.
Wrapping it up
Yes, the holidays are a time for giving -- but only friends and families will hand you free money. Remember that these four stocks have a great deal of potential to appreciate from their depressed states, yet there was a reason why they all once traded significantly higher. In short, you can't spell brisk without risk. So dig into the goodie bag of due diligence as you take a closer look at these companies.
You'll never know where you will uncover the next great Rule Breaker stock. And as far as cheap seasonal gifts go, I'll take stocks over fruitcake anytime.
Longtime Fool contributor Rick Munarriz still has no idea what he will find in his stocking this year. He does own shares in one of the stuffers -- NetManage. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
