I’ve been singling out attractive opportunities in low-priced stocks since my original “10 Stocks Under $10” column a dozen years ago, and I’ve seen plenty of stocks with pocket change prices generate incredible gains.
There are risks, and they are readily apparent given the recent volatility. There are often good reasons for stocks to be ignored or beaten down. However, a market rally can work wonders for the unloved with positive catalysts in their pockets.
Let’s go over my five picks from March 2009 — when low-priced stocks bottomed out — to prove my point.
| Company | May 17, 2013 | March 13, 2009 | Gain |
|---|---|---|---|
| Sirius XM Radio | $3.50 | $0.198 | 1,668% |
| Bare Escentuals* | $18.20 | $3.66 | 397% |
| Focus Media | $27.38 | $5.74 | 377% |
| Geron | $1.12 | $4.36 | (74%) |
| Ford | $15.08 | $2.19 | 589% |
*Bare Escentuals was acquired for $18.20 a share in 2010.
The average gain of 591% in four years is pretty remarkable.
Even with Geron crashing as the lone stinker, the other four multibaggers have easily trounced the market by excelling in satellite radio, cars, and Chinese advertising.
Let’s go over this month’s picks.
Millennial Media, Inc. (NYSE:MM) — $8.01
Smartphones are soaring in popularity, and Millennial Media, Inc. (NYSE:MM) is in the right place at the right time. The leading independent mobile advertising platform provider allows app makers to cash in on their programs with display ads across all operating systems.
As you can imagine, this is a hot industry. Millennial Media, Inc. (NYSE:MM) posted a 50% spike in revenue for its latest quarter earlier this month. The challenge for Millennial Media, Inc. (NYSE:MM) has been to remain consistently profitable.
Analysts expect that to change during the second half of this year. Wall Street’s betting on a modest profit of $0.14 a share this year bumping up to earnings of $0.42 a share next year. Millennial Media, Inc. (NYSE:MM) is growing quickly. It just entered the Japanese market last week. It’s cheap at a forward earnings multiple in the high teens.
Brocade Communications Systems, Inc. (NASDAQ:BRCD) — $5.54
Last week didn’t work out so well for the networking storage specialist.
Brocade Communications Systems, Inc. (NASDAQ:BRCD) posted better-than-expected earnings, but coming in a little light on the top line and providing uninspiring guidance was a deal breaker for Mr. Market. RW Baird stepped in with a downgrade following the report, which may have felt cruel since Brocade Communications Systems, Inc. (NASDAQ:BRCD) had presented at a Baird tech conference just the week before.
The good news here is that Brocade Communications Systems, Inc. (NASDAQ:BRCD) is still very profitable. Revenue growth may be hard to come by these days, but Brocade Communications Systems, Inc. (NASDAQ:BRCD)’s still delivering healthy margins as it trades at an earnings multiple in the single digits.
Zagg Inc (NASDAQ:ZAGG) — $5.03
Shares of Zagg Inc (NASDAQ:ZAGG) were destroyed three weeks ago, and deservedly so.
The company behind the invisibleSHIELD protective smarpthone and tablet covering stunned the market with a dreadful quarterly report. Wall Street was betting on a 20% pop in revenue. Zagg Inc (NASDAQ:ZAGG) came through with a 7% decline. Analysts were holding out for $0.21 a share. ZAGG earned half as much.
The damage has been done. Now it’s time to assess Zagg Inc (NASDAQ:ZAGG)’s value in light of its weaker fundamentals. The stock has fallen a lot harder than profit projections, leaving Zagg Inc (NASDAQ:ZAGG) an intriguing value for bottom-feeders here at seven times this year’s expecting earnings and just six times next year’s call.
With the company armed with an arsenal of third-party accessories for the mobile market, the best time to buy into ZAGG is when it’s out of favor.
Spoiler alert: Zagg Inc (NASDAQ:ZAGG) is out of favor.
ARMOUR Residential REIT, Inc. (NYSE:ARR) — $6.02
A popular misconception is that investor appetite for yield in this low interest rate environment has sent high-yielding master limited partnerships, REITs, and business development companies to lofty valuations.
It may be true in a lot of cases, but it doesn’t apply to ARMOUR Residential REIT, Inc. (NYSE:ARR), a mortgage-based REIT that emphasizes adjusted rate instruments. ARMOUR sports a nearly 14% yield, and it’s trading for just five times this year’s projected profitability.
There are some valid reasons for ARMOUR Residential REIT, Inc. (NYSE:ARR) being one of the few REITs trading lower over the past year. Since moving to a monthly dividend of $0.12 a share two years ago, it has come through with five rate decreases. Investors are now receiving $0.07 a share every month.
ARMOUR is also expected to post lower earnings this year, possibly pressuring the REIT into another dividend cut. Oh, and it has also missed Wall Street profit targets in each of the past three quarters, so analysts have actually proven to be too optimistic in assessing ARMOUR’s financial performance.
However, worrywarts bracing for another payout cut have bid the stock below book value. It’s not that bad here. Despite the first quarter’s lower-than-expected results, ARMOUR is still generating annualized ROE of 13.8% from taxable REIT income. With analysts seeing the earnings deterioration stabilize next year, we could be nearing the end of the distribution cuts.
NovaGold Resources Inc. (USA) (NYSEMKT:NG) — $2.13
Shares of NovaGold Resources Inc. (USA) (NYSEMKT:NG) tumbled 15% last week, but there wasn’t any company-specific news behind the slide. Many of the precious metals companies suffered double-digit percentage hits as gold, silver, and copper prices continue to head lower.
If Millennial Media is unloved despite being in the right place at the right time, NovaGold is out of favor because it’s in the wrong place at the wrong time.
NovaGold Resources Inc. (USA) (NYSEMKT:NG) didn’t help its case last month when it posted a larger quarterly deficit than Wall Street was expecting, and that’s the third period in a row that the gold miner has come up short on the bottom line.
I have never fancied myself a gold bug, and I can name several fellow Fools who know the industry far better than I ever will. However, I do know that the smart move was to bail several months ago when everyone was talking up commodities and every other ad seemed to be for a service buying back gold. Now that speculators have turned away from precious metals, wouldn’t that make this a good time for contrarians to buy back in?
Five for the road
These five stocks aren’t trading in the single digits by accident. If I’m right about the catalysts, though, they may not be trading in the single digits for too much longer.
Finding promising stocks while they’re still cutting their baby teeth is at the heart of the Rule Breakers newsletter that I write for. You can check it out for free this month with a 30-day trial subscription. There are roughly a half dozen active stock recommendations in the growth stock research service trading for less than $10 at the moment. Check those out, and I’ll be back with more on the third Monday of next month.
The article 5 Stocks Under $10 Worth Buying originally appeared on Fool.com and is written by Rick Munarriz.
Longtime Fool contributor Rick Munarriz owns shares of Ford and Millennial Media. The Motley Fool recommends and owns shares of Ford.
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