It's baseball season again, so let's use the occasion to remind ourselves of this simple fact: You can't get much for $5 these days. A seat? In the nose-bleed section at best, and not at all in most parks. A few beers at the game? One, if you're lucky. A hot dog? Only the scrawniest breeds.
But don’t fret. There's another spot where a five-spot can be well spent: the stock market. There are plenty of "cheap" stocks for under $5, bargains that offer great returns for patient investors.
One reason you can find good deals is that many mutual funds bar their managers from shopping in the markets discount bin. And some of these stocks are cheap for a reason. The trick is to find companies that are fixing their problems and have enough financial strength to survive in the meantime.
Here are five of my favorites that could perform like stocks on steroids over the next two years.
Nortel Networks
Its ironic how many disaster stocks from the bubble days are making investors wealthier again. For example, JDS Uniphase is up 150% since I put it in my "5 under $5" column a year ago. Its also the best-performing stock in my model portfolio.
Given the potential for these one-time high fliers to bounce back, its worth listening when a sharp-eyed value investor like George Putnam of The Turnaround Letter -- who suggested JDS Uniphase -- says it's time to buy another one.
This time its Nortel Networks, which makes communications networking gear. Nortel stock has been pinned down for more than a year by sluggish growth and a series of accounting mishaps. But Putnam believes the accounting issues are winding down. The most recent restatement, for example, sounds innocent enough: a question regarding the correct time to recognize certain revenue.
Nortel is also in the early stages of a turnaround under the leadership of Chief Executive Mike Zafirovski, who spent 25 years at General Electric before joining Nortel late last year. Zafirovski has an ambitious restructuring plan that he thinks will add $1.5 billion to operating profit by 2008.
Improving demand for networking gear will help him, says Putnam, who owns Nortel in managed accounts. He reckons Nortel stock could more than double over the next year or two. Putnam is worth listening to because his newsletter has produced an average annual gain of 18.7% over the past 15 years, according to Hulbert Financial Digest.
Generex Biotechnology
Generex Biotechnology is a speculative bird-flu play, but dont let that ruffle your feathers. The company has several potential product lines, and insiders bought the stock again in March at $3.22. Ill take that as a sign the companys two main areas of research -- vaccines and a novel drug delivery platform -- hold promise.
Generex develops synthetic vaccines made from proteins that are tweaked to look like a virus. They are close enough to trick the body into thinking it has been exposed to the real deal, so they ready the immune system for an attack. But the designer proteins wont kill people -- like real vaccines can.
Another advantage is that the proteins can be made faster than normal vaccines. "This allows you to inoculate large numbers of people very quickly," says Anna Gluskin, the company's chairman and chief executive. That could come in handy if we ever need a big supply of bird-flu vaccine in a hurry. Generex is developing designer vaccines to fight HIV, skin cancer and breast cancer.
Generex also has a user-friendly drug delivery system that lets patients spray an aerosol version of medications into their mouths. The trick is that compounds in the spray block the breakdown of drug molecules long enough for the membrane inside the mouth to absorb them. The delivery platform, called "RapidMist," is already approved in Ecuador as a way to take insulin. Generexs oral insulin spray is called Oral-lyn.
Oral-lyn is still two years or so away from approval in major markets like the U.S., Canada and Europe. But Generex has $43 million in cash and a modest cash burn rate of about $1.8 million per quarter. A partnership with a bigger drug company could juice the stock before Oral-lyn hits a major market. RapidMist may also be deployed to deliver other medications, such as morphine.
Visteon
If you drive a Ford, chances are your cars air conditioner, sound system or instrument panel were made by auto-parts supplier Visteon, based in Van Buren Township, Mich.
Because Ford Motor accounts for 47% of Visteon sales, the big auto makers bumpy ride has been hard on Visteon. Visteon shares have fallen to $4.35 from nearly $11 in September. Visteon is also losing money, and it is saddled with a huge amount of debt.
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But insiders have been nibbling recently in the $4.56 to $4.98 range, according to Thomson Financial. This may be why: A restructuring aimed at cutting costs and developing more non-Ford revenue could make this stock a double within two years, believes Putnam, who owns the stock in managed accounts.
Visteon hopes to reduce its Ford dependency by doing more business with Asian automakers. It already sells to Hyundai Motor, Nissan Motor and Kia Motors. The company also has targeted 23 plants for restructuring in the next three years. Visteon is moving production to areas with lower labor costs like China, Mexico and the Southern U.S.
Visteon has almost $2 billion in debt. But it has $865 million in cash, and the company expects to produce $50 million in free cash flow this year. That will help it clean up the balance sheet, says Caylon Securities analyst Joseph Amaturo, one of the few Wall Street analysts with a buy rating on the stock. He thinks Visteons restructuring could drive the stock as high as $11 inside a year.
Visteon looks like a steal because it sells for less than the value of its 70% stake in a Korean car-parts maker called Halla Climate Control, says Amaturo. Visteon has an astonishingly low price-to-sales ratio of .03.
Peru Copper
Over the past two months, shares of Vancouver, B.C.-based Peru Copper have fallen to $2.70, from nearly $4, on worries that left-wing presidential candidate Ollanta Humala may come to power in Peru.
Humala, who wants to increase taxes on foreign mining companies and revisit their contracts, beat contenders in the first round of presidential elections held in April. Peru will now hold a run-off election in May, because no candidate got more than 50% of the vote.
Tom Winmill, who manages the Midas Fund (MIDSX), reckons a pro-business conservative candidate will win in the final election. If so, shares of Peru Copper will rebound to $4 to $6, Winmill predicts. Winmill thinks theres a 20% chance the election could go the other way, which could send the stock lower. Winmill holds Peru Copper in the Midas Fund, which has posted gains of more than 86% over the past 12 months.
Peru Copper owns the rights to exploit rich copper deposits in central Peru, called the Toromocho Project. Studies paid for by the company put the "net present value" of Peru Coppers potential production at around $920 million. Meanwhile, the company has a market cap of $240 million. So the stock looks like a cheap way to play the commodities boom, assuming the elections go accordingly. Even before Peru Copper starts mining -- which wouldnt happen before 2010, at the earliest -- a bigger mining company may buy Peru Copper, says Winmill.
ActivIdentity
What do spies, New York Stock Exchange employees and pharmaceutical-sector chemists have in common? To get in their offices and sign on to their computers, they all go through security systems made by ActivIdentity.
Although ActivIdentity boasts an impressive list of blue-chip clients, including Bristol Myers Squibb, Hewlett-Packard and the Department of Defense, its stock has been troubled. Its down to $4.50 from $9 in early 2005.
Whats the problem? ActivIdentity has been plagued by management turnover at the top, negative cash flow and sluggish orders from government, a main customer.
The good news is that ActivIdentity has a huge amount of cash -- about $154 million, or $3.45 per share. That gives a new management team breathing room while it stages a comeback. "Theyve got so much cash, they can be very flexible in figuring out how this market will evolve for them," says Mark Mowrey, a technology stock analyst with the Al Frank Fund, which holds the stock. The Al Frank Fund has an annualized return of 18.7% over the past five years, or 14 percentage points better than the S&P 500, according to Morningstar.
ActivIdentity broadened its product line last summer with the purchase of an Australian company called Protocom Development Systems. ActivIdentitys security systems typically require employees to use smart cards or randomly generated access codes.
The company may also get a boost later this year as the feds finally get around to implementing a homeland security directive launched two years ago to make government buildings more secure. National ID card programs in Europe and a move toward more secure credit cards there should also help. A final warning
If you are new to the market, a good way to start with under-$5 stocks is to shop for an online brokerage that charges commissions of less than $12. Just keep in mind three basic rules with these stocks:
- Don't put too much money in any one of these companies -- not more than 5% of your overall stock portfolio.
- Plan to hold them for at least a year or two. These aren’t quick trades.
- Dont buy them if this column drives up their prices by more than 5% on the day it runs. Wait for a pullback.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column. |
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