One of the most fertile areas for investment research can always
be found among stocks that trade for less than the price of a
When a stock is below $5 or $6, many mutual funds are prevented
from owning them. Yet if these stocks can make some headway and
move up toward the $10 mark, then the stocks will begin to pop up
on fund managers' radars. And when they begin to pour money into
these stocks, their buying efforts can quickly move shares up into
the low teens.
With that in mind, I wanted to take a fresh look at my favorite
names that are trading below $6. That's not to say that these
stocks are micro-caps or nano-caps -- I tend to like companies that
are worth at least $250 million, as they have to be at least that
large to ever get noticed by those stock-moving fund managers.
Here's a quick synopsis of my current favorite stocks under $6.
JetBlue (Nasdaq: JBLU)
This low-cost airline is gradually morphing from industry upstart
status into maturity. Gone are the days of white-hot growth, but
JetBlue is quietly becoming a profit machine. Per share profits are
likely to double this year, and as long as the
stays aloft, per-share profits should rise another +50% in 2011 to
That profit surge comes even as revenue growth is expected to slow
to around +10% next year. I always like to see profits growing
faster than sales, as it means that a company is able to squeeze
more profits out of each incremental dollar of sales. For JetBlue,
comes from continually optimizing its route structure to re-direct
empty planes to cities where demand is more robust.
In the most recent quarter, JetBlue flew +5.5% more passenger miles
than a year ago, but the number of customers grew nearly +9%.
Whereas planes were 79.5% full a year ago, they're now 82% full.
The extra revenue from those additional customers is pure gravy, as
the flight attendants, pilots and fuel costs need to be spent
whether a plane is half-full or completely full.
Even as JetBlue reaches maturity, it still has more paths to
growth. The carrier has nearly $1 billion in unrestricted cash and
may look to keep expanding. In recent years, the company has
focused on expansion into the Caribbean and Latin America. Those
routes have historically been very profitable for the larger
carriers such as
. Further inroads into these areas from JetBlue's New York and
Orlando hubs could help the top and
keep expanding for some time to come.
I continue to think that this maker of educational toys is emerging
as a great
play. I wrote about Leapfrog in July and since then, the company
modestly exceeded second-quarter forecasts. [Read:
The Best Idea of the Week
But this is really a seasonal play as the company derives almost
all of its profits during the holiday shopping season. It's
encouraging that Leapfrog is posting improving results, and shares
can move back to the $7 level seen in April if September results
are impressive. But the real break-out for this former highflyer
wouldn't come until confidence is increased that the holiday
shopping season will be a strong one.
Innerworkings (Nasdaq: INWK)
Speaking of former highflyers, this provider of corporate printing
services and marketing supplies has seen its shares fall from $18
back in early 2008 to a recent $5.50. That's because growth sharply
decelerated as clients cut back on many marketing campaigns.
But Innnerworkings is growing once again. Sales rose +20% in the
most recent quarter from a year ago, and
earnings per share (
is starting to slowly climb quarter after quarter. To help sales
rebound, Innerworkings is putting more resources behind a division
that handles Business Process Outsourcing (
). In a nutshell, BPO allows large enterprises to focus on their
core business and devolve non-core functions such as document
management, business workflow and other mundane tasks to firms like
Analysts expect sales to rise +15% both this year and next, but
it's worth noting that Innerworkings has a history of making
highly-accretive acquisitions to bolster growth. If the company can
pull off a few small deals, growth could exceed +20% next year.
Although I don't see shares returning to those 2008 heights, I
still see upside to the $9 to $10 range in the next year as
investors once again embrace this company as a nice and steady
China Security & Surveillance (
It's fair to wonder what it will take to really get these shares
going. China Security is one of the leading suppliers of security
gear to companies and governments in China. The company has posted
impressive growth, as sales have risen at least +35% in each of the
last four years.
After stumbling in the March quarter, China Security posted much
stronger results in the most recent quarter. When results came out
in late July, the stock rose +16% in one day to more than $6. Less
than a month later, investors have already forgotten the name and
it is slowly drifting back toward the $5 mark.
But this is still very much a growth story. China Security has
begun to sign an increasing number of government contracts, which
typically carry gross margins 500 basis points higher than
corporate contracts. The spurt in government business is
attributable to a "safe-city" program that seeks to deploy banks of
video cameras, traffic management systems and emergency response
systems in China's 200 largest cities. The new government contracts
have helped push China Security's
for delivery within the next 12 months up to $213 million from $130
million a year ago and should help meet analysts' sales forecasts
in coming quarters.
Meanwhile shares trade for about five times this year's projected
profits. The low multiple is partially due to the fact that the
company has often issued fresh rounds of new stock to raise cash.
Management insists that the capital-raising efforts are now
completed. If China Security can continue to deliver impressive
quarters and refrain from diluting stock any more, then shares may
finally start to garner a more robust
Action to Take -->
All of these companies are boosting sales and profits, but their
shares are far closer to their all-time lows than their all-time
highs. A stumbling global economy might keep a lid on these shares
for a bit longer, but when the economy rebounds and growth stocks
are back in vogue, they could zoom ahead quickly. You may also want
to listen to each of the companies' upcoming conference calls to be
assured that management continues to execute on plan.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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