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-multibagger returns don't come along as often as Fools might hope.

Price means nothing
Here at the Fool, we do our best to diagnose and prevent the critical stock affliction known as "cheap-osis" -- the belief that a stock's price per share, on its own, tells you whether a stock is cheap or expensive; attractive or unattractive; a winner or a loser.

Through splits and reverse splits, management can make the price of its shares literally anything it wants. That's the reason a $100 stock like Chipotle Mexican Grill (NYSE:CMG) (NYSE:CMG-B) 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 with five-star CAPS ratings that nonetheless trade at less than $10. Here's this week's roundup:

As always, don't view these stocks as formal recommendations -- just ideas you may want to research further. That said, PCTEL and SumTotal Systems might deserve some of your own Foolish due diligence.

Tattle TEL
Six-months ago, PCTEL, a Chicago-based wireless connectivity provider, was holding strong in the high $10's. But because of a string of gloomy news -- including lowered short-term guidance and the closure of its Ireland antenna plant -- PCTI has since fallen 30% into low-priced territory. I can't say that a turnaround will happen, but CAPS players have at least a couple of reasons why it should.

First and foremost is PC-TEL's portfolio of broadband and mobility solutions, which have been adopted by the likes of AT&T (NYSE:T), T-Mobile, and NTT DoCoMo. Over the past five years, revenues have grown at a compounded rate of 20%, so at the very least, it's not a complete stretch to think that demand should pick up.

Second, with more than $65 million in cash, and management leaving the antenna business to focus on its core competencies (Wi-Fi, WiMAX, and GPS), PCTI seems to be in a healthy position going forward. And finally, all three professional firms that cover PC-TEL on CAPS -- Ferris Baker Watts, B. Riley, and RW Baird -- also like the company's prospects.

CAPS All-Star TMFPlatoish compares PC-TEL to yet another Foolish favorite:

I ran across PCTEL while researching one of my holdings -- Smith Micro Software (NASDAQ:SMSI). PCTEL is a competitor in the wireless connectivity space.... Marty Singer is a solid CEO and their institutional holders are led by great small cap investors. They have a solid balance sheet with around $3/share of cash to play with, should good acquisitions present themselves. They are a small emerging company that should show explosive growth in the connectivity business over the next couple of years.

Sum of the parts
SumTotal Systems, a California-based business software provider, is another low-rider for which our community has high hopes. Like PC-TEL, this company's had its own share of losses over the last few months. The biggest came on Aug. 1, when shares plummeted 24%. A disappointing Q2 earnings report triggered that pounding, but once again, our community has chosen to take a longer-term view of the situation.

For the uninitiated, SumTotal provides more than 1,500 business education solutions to companies from a wide range of industries. Revenue has grown at a compounded rate of 25% over the past five years, while analysts expect the bottom line to grow at a 20% clip for the next five years. With a PEG of 0.93, the market's sell-off might have been a tad overdone.

In fact, since the company's $15 million buyback announcement a little more than a month ago, the stock is up 15% -- a possible indication that management (just like our CAPS community) sees a good deal.

CAPS player Foxypicker modeled for us Fools right after the Aug. 1 drop:

Based on their earnings report yesterday afternoon, they have tumbled almost 25%. Yet, when I do a spreadsheet to project their balance sheet 5 years into the future (using their actual y-o-y data, which is pretty much in line with analysts' long term growth estimates of 18.5%), I estimate a fair market value of $11.60 -- which will grow to $27.10 by this time 2012. I bought 5000 shares during the bloodbath this morning and plan to hold long term.

The Foolish conclusion
Despite our Foolish attempts to educate the investment public about cheap-osis, the allure of low-priced stocks is simply undeniable. Happily, the market does contain single-digit wonders that can also make great investments.

If you really have a bad case of the 'osis, and you'd like to find more good low-priced stocks for yourself, head over to our Motley Fool CAPS community. It's 100% free -- the lowest price you'll find anywhere.